After an earnings miss and over a 12% decline in its price, Ralph Lauren Corp ($RL) traded down to some major support – the 200 Day Moving Average. (see the blue line in the chart)
After earnings, a stock usually experiences a significant drop in its implied volatility or the amount of premium priced into its options. But, because of the decline on earnings, the implied volatility didn’t fall as much as we typically see.
Combined with the big support area of the $123 area, we issued a signal to sell a put spread to sell the November 16th (next week expiration) 122/120 put spread for a credit of $0.90. Four hours later, after a rally of $4, the put spread was trading around $0.40. So here is the question: WHAT IS THE CORRECT DECISION TO MAKE? Do we let the put spread keep working or as traders, do we look at this and realize that a massive profit was at hand?
Well, I always live by the mantra of “Bulls and Bears Prosper – Pigs Go to the Slaughter.” With that in mind, we sent a signal to close the position, take our profits, and look to invest them elsewhere.
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