ROYAL CARIBBEAN CRUISES: Obstacle Cruise (UPDATE)
We are indeed dealing with the Titanic and keep cruising.
Executive Summary
We celebrate our first trade UPDATE.
Implied volatility contracted, yet more time is needed for a price retrace.
We add more credit and time while reducing risk.
1. Recap Situation
This is our first MacroDoζer trade UPDATE. I feel like we have to celebrate. Firstly, all other trades had been successful up to this point, with no adjustments needed. Secondly, you and all the other BrainDoζer Street-Sharps get to see how to roll an option contract and adjust the trade for more credit, reduced risk, and additional time.
A quick recap of the situation.
We are trying to steer the Titanic by selling premium on the cruise company Royal Caribbean (RCL) via a risk-defined strangle (iron condor). Implied volatility was close to 100%, and premium selling seemed reasonable. A contraction of implied volatility played into our hands; however, the underlying price went ahead of itself and didn’t look back since.
Check out the original BrainDoζer below.
2. Why Now?
Parts of our underlying thesis that RCL will not continue to go straight up from here without looking back at least once with a minimum of thirty percent retrace from its recent October lows have not changed. There is a recession, a food & energy crisis, and a world war around the corner, remember? Hence, we feel comfortable rolling the trade into next month and waiting for a retrace back into the profit zone.
Generally speaking, we only roll contracts and add more time if we take in additional credit and reduce total risk. The strikes of the untested side (in our case, the put side) can be moved further toward the underlying price for more credit. We do not touch the strikes of the tested side.
The risk-defined strangle turns into a risk-defined straddle.
3. Trade Execution
3.1 Trade Entry - Oct 7, 2022
Total: 5.25 Credit.
RCL: Pay-Out Graph Short Strangle (Risk-Defined) - Sell To Open.
3.2 Trade Update - Nov 1, 2022
Total: 7.70 Credit.
RCL: Pay-Out Graph Short Straddle (Risk-Defined) - Sell To Open To Roll Into Next Month.
Total: 6.60 Debit.
RCL: Pay-Out Graph Long Strangle (Return-Defined) - Buy To Close To Roll Into Next Month.
The new total net credit of this rolled trade is
(5.25 - 6.60) + 7.70 = 6.35
The new risk or capital employed for this rolled trade is
(6.60 - 5.25) + 2.30 = 3.65
The maximum profit potential has been increased while the risk or capital used has been decreased.