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After 8 successful BCS that have closed early, I now have a pretty clear loser in Dermtech:

DMTK Dec 17 '21 40/45 Call (38 days to expiration)

I bought this spread back on 6/1 for a $1.70 debit (34%) with DMTK trading at $38.50. With yesterday's blah earnings report, the underlying has too far to go to get into the money. After being down at the open, DMTK has traded up a bit to $27.80. Per pricing as I write this, the mid-point to close offers a $0.25 credit. Should I take whatever I can get now or put in a GTC at the ask ($0.40) or wait for it to get closer to expiration?

I don't see any catalysts coming in the near term. However, it's a volatile stock, so it could easily move 10% in either direction prior to expiration. My limited experience says a GTC order at the ask, but I wanted to ask the community before moving forward. I know we are talking nickels here, but nickels matter when managing a portfolio of vertical spreads.

Thanks,

--John
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FoolforBCS: After 8 successful BCS that have closed early, I now have a pretty clear loser in Dermtech:

DMTK Dec 17 '21 40/45 Call (38 days to expiration)

I bought this spread back on 6/1 for a $1.70 debit (34%) with DMTK trading at $38.50. With yesterday's blah earnings report, the underlying has too far to go to get into the money. After being down at the open, DMTK has traded up a bit to $27.80. Per pricing as I write this, the mid-point to close offers a $0.25 credit. Should I take whatever I can get now or put in a GTC at the ask ($0.40) or wait for it to get closer to expiration?

I don't see any catalysts coming in the near term. However, it's a volatile stock, so it could easily move 10% in either direction prior to expiration. My limited experience says a GTC order at the ask, but I wanted to ask the community before moving forward. I know we are talking nickels here, but nickels matter when managing a portfolio of vertical spreads.


Don't really have any opinion on your presenting question, if only because it is "only nickels."

But your post leaves me with some questions. I've got one expiring BCS (ATVI, expiring in Jan 2022) and currently several dollars under the long leg's strike, a bit over $7 to get to break even). The relatively few other BCSs that are currently "in the red" have plenty of time to get there, although LMND isn't looking promising even with that cushion of time (Jan 23).

What I'm struck by is your spread compared to the market price on the day you set it up; even then, only a few days over five months ago, it had to increase in value by quite a bit in order to even get to break-even.

Making me wonder: what sort of assessment did you go through in setting that spread up?

I won't claim to do all kinds of analysis of each company, but I always look for candidates that are:
--highly recommended by one or more of the Fool services AND
--currently around 30% below their 52-week high AND
--even then I set the spread with the market price in between the lower and the upper strikes OR
--higher than both, AND
--yielding (if it succeeds) at 125% or more in profit over the spread's life span

In your case, it sounds like you were hoping for a lot to happen in a relatively short time (I always go out as far as possible too; didn't mention that). So you had higher potential reward for higher risk, with the risk being compounded by the shortness of time allowed.

I know you've written about your love affair with BCSs, and I share your enthusiasm. It would appear, though, that we go about that affection in quite different styles. Or was this DMTK spread an outlier even in your portfolio?

mathetes
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mathetes: In your case, it sounds like you were hoping for a lot to happen in a relatively short time (I always go out as far as possible too; didn't mention that). So you had higher potential reward for higher risk, with the risk being compounded by the shortness of time allowed.

I know you've written about your love affair with BCSs, and I share your enthusiasm. It would appear, though, that we go about that affection in quite different styles. Or was this DMTK spread an outlier even in your portfolio?


I wrote this about the trade in my tracking spreadsheet on the day it executed: Added to Saul's board for consideration on 5/31. 53% off 52 week high. Highly recommended on TipRanks. Never failed historically when trading at this much off 52-week high. High Risk = High Reward.

I entered the trade with DMTK at $40 (it executed with DMTK at $38.50). It fit 2 of 3 of my criteria:
--highly recommended by TipRanks ($65 avg price target) and/or followed on Saul's Board and/or MF recommended
--down 53% from 52-week high
--six-month historical success rate of 60% overall and 100% when trading this far below 52-week high (with a 12.5% gain needed to exceed the upper call and 4.3% gain to breakeven)
--max return of 192% or 350% ARR
--based on above, I applied an 80% probability of success to this trade for a potential 280% ARR

My measuring stick for high-risk trades is potential 175% ARR, so if fit well into my bucket of high-risk trades. I know the loss rate will be higher (maybe even closer to 50%) but my analysis says the higher returns should more than offset. We shall see as more and more BCS trades come to fruition.

My overall portfolio stats for 66 spreads are 36.3% average debit, 12.3 years to expiration, and projected risk adjusted ARR of 140%. I have "safe" names such as AAPL, SHOP and NFLX and other high-risk such as FUBO, SKLZ, UPST, and SMRT. The average for my open spreads is (as of last Friday) 10% above the lower call and 2% below the upper call. The XIRR on the 8 spreads that have closed is 1503%. I expect that number to fall dramatically as time passes and my loser trades begin to factor in.

I've also been working on a new portfolio of combo trades where I'm using the credit from a bull put spread to pay the debit on a bull call spread. More on that later.

--John
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What does BCS stand for?
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Bull Call Spread

For simplicity and ease of response, I'll let Investopedia give you a definition: https://www.investopedia.com/terms/b/bullcallspread.asp

It's in what is often referred to as "Verticals" that includes BCS, Bear Call Spreads, Put Debit Spreads, Put Credit Spreads, Iron Condors, etc
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Thanks. I trade CALLs and PUTs all the time, but have never traded the more complex instruments.

I appreciate this link.
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PeregrineTrader: Thanks. I trade CALLs and PUTs all the time, but have never traded the more complex instruments.

I appreciate this link.


You're in the Options service, though, here at the Fool. Have you not read the Options U materials? They're also worth reading, more than once.
The basics: https://www.fool.com/premium/options/optionsu/essentials/
Basic Strategies: https://www.fool.com/premium/options/optionsu/strategies/
Advanced: https://www.fool.com/premium/options/optionsu/masters/

mathetes
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You're in the Options service, though, here at the Fool.

This is one of the free Options boards at the Fool so it doesn't necessarily indicate a subscription to the TMF Options service. The "Options" prefix on the board name is a bit confusing but there is a dash (-) here as opposed to the colon (:) for the service boards.

-Daniel
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FoulWeather: This is one of the free Options boards at the Fool so it doesn't necessarily indicate a subscription to the TMF Options service. The "Options" prefix on the board name is a bit confusing but there is a dash (-) here as opposed to the colon (:) for the service boards.

"A bit confusing" is an understatement: There's that (dash vs colon) AND then the fact that if you have it selected as one of your favorite boards, it comes up in sequence with the Options Subscription boards, albeit at the bottom.

Ah well.... thanks for clarifying. I've only been around these boards for twenty years. 🙄

mathetes
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