Yesterday EEM blew through our adjustment point of $152.80 in the final half-hour of trading, and we’re sitting on a 10% loss right now,. . . but there’s still good reason to stay in this trade.
One way to turn the trade around would be to sell the entire put-spread position and buy an equal number of contracts in a call spread at 160. This would turn our 140/150 double-calendar into a 150/160 double-calendar, moving our break-even points up by about $10—but then we’d be taking on much greater downside risk.
But there’s another option that raises our upper break-even point and still leaves a safety net on the downside. If we sell half of the put spread at 140 and buy a half position in a call calendar spread at 160, we can turn this double-calendar into a center-weighted triple. With this adjustment, we’d recoup the current loss as long as EEM is between about $143 and $160 at expiration—and, we could end up with at least a 10% profit, if the shares are trading between $146 and $155 at expiration (barring a significant further drop in implied volatility). Finally, we’ll probably have a chance to adjust again if the rally continues (or reverses too far).
The Trade
In light of the continuing strength in world markets, balanced with the risk of overbought conditions, we’re making the following adjustment to our June EEM double-calendar spread:
-1 EEM Sept 140 put
+1 EEM June 140 put
for a net credit of $3.90.
+1 EEM Sept 160 call
-1 EEM June 160 call
for a net debit of $4.45.
Our new breakeven points are $143.70 and $159.50. Note that in this adjustment, one contract represents half of our initial position. For example, if we had started with a 4-contract position, we’d be taking 2 contracts off the put spread and adding 2 call spreads at 160.