At the end of October Dan check in on chip equipment maker KLA Tencor (KLAC) which had been beaten up on bad guidance and in a sector that’s been in the bears’ sights for the past few months. At the time, KLAC was 88.50 and dan detailed a mildly bullish, and fairly inexpensive call fly into earnings. Here was the trade idea, from Oct 29th:
BULLISH TRADE IDEA: KLAC ($88.50) BUY DEC 90 / 100 / 110 CALL BUTTERFLY FOR $2
-Buy to open 1 Dec 90 call for $4.80
-Sell to open 2 Dec 100 calls at $1.60 each or $3.20 total
-Buy to open 1 Dec 110 call for 40 cents
KLAC was higher following its report and has been pretty solid since despite volatility elsewhere in the market. With KLAC just shy of 96 now this trade is well positioned and profitable, currently worth about 4.50 versus the initial 2.00 cost. It has some time left until it expire on the 21st of December. Intrinsically it is worth nearly $6 here, so it has some potentially profitable time value yet to be captured. Of course, the profits are at risk if the stock closes below 92 on the 21st, and it could still be worthless if it closes below 90.
So from a trade management standpoint there are two levels to keep an eye on on the downside, 94.50 is the level where even if the stock moved lower to that point by the 21st the trade would be about as profitable as it is now, so one can be a little patient on a slight move lower. And then of course 92 is the breakeven on the initial cost of the trade so that’s a make or break level you don’t want to allow the stock to get below under any circumstance. So patience is a virtue here with a short leash if the stock goes lower. On the upside, this trade can be worth up to $10 if the stock closes at or near $100 on expiration. So patience would also pay off if the stock continues higher with a target of 100 as a good spot to take profits.