November 7, 2018

Playing the Drop in RL

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.

Please follow me on Twitter:  @cboesib

[thrive_leads id=’272′]

about the author:

Scott Bauer

A respected market commentator seen on Bloomberg, Fox Business, CNBC and other major financial networks, Scott Bauer has 25 plus years of professional equity and index options experience at the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) and as a Vice-President/trader for Goldman Sachs. Scott graduated with Honors from the University of Illinois Business School and has taught classes both at his alma mater and at the CBOE.

Read Similar Articles

May 8, 2024

What Is Delta In Options Trading?

Understanding the Delta of an option is crucial for both new and seasoned traders. It’s one of five specific calculations called “Greeks,” which help measure specific factors that could influence the price of an options contract. Delta is a metric that helps you gauge how much the value of an option contract is expected to […]

Read Article
March 28, 2024

What is Rho in Options Trading? (Option Greeks Explained)

Rho is the rate at which the price of a derivative changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate. Rho may also refer to the aggregated risk exposure to interest rate changes that exist for a book of several options positions. For example, […]

Read Article
March 25, 2024

You Have A Lot Of Options Out There

There are a number of different types of options expiration types.  In the vast majority of our signals, our options will be categorized as “American”-style options.  There are some, like VIX options, that are “European”-style options.  Here’s a quick explanation of both. The term “American style” in relation to options has nothing to do with […]

Read Article

Read Similar Articles

May 8, 2024

What Is Delta In Options Trading?

Understanding the Delta of an option is crucial for both new and seasoned traders. It’s one of five specific calculations called “Greeks,” which help measure specific factors that could influence the price of an options contract. Delta is a metric that helps you gauge how much the value of an option contract is expected to […]

Read Article
March 28, 2024

What is Rho in Options Trading? (Option Greeks Explained)

Rho is the rate at which the price of a derivative changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate. Rho may also refer to the aggregated risk exposure to interest rate changes that exist for a book of several options positions. For example, […]

Read Article
March 25, 2024

You Have A Lot Of Options Out There

There are a number of different types of options expiration types.  In the vast majority of our signals, our options will be categorized as “American”-style options.  There are some, like VIX options, that are “European”-style options.  Here’s a quick explanation of both. The term “American style” in relation to options has nothing to do with […]

Read Article