I sold HIMX April 8 calls and bought HIMX April 9 calls today.
HIMX has been great for the longs over the course of the last month. I posted about this stock last week (HIMX – Back From The Dead?). At that time, I bought the April $8 calls, but now that they are ~$0.60 in-the-money, I am looking at rolling my position to get more leverage for the next leg higher.
Let’s look at a daily chart to review the game plan:
Chart from FreeStockCharts.com
A few key things have happened since my post last week. First, we extended above the February 21st high at $7.55. This brought the 200 Day Moving Average into play, and we took that out with ease over the last 3 days. We consolidated yesterday, but extended early this morning. Now we can see a clear path into the $9+ range with a chance of even greater upside if more bulls (whether technical or fundamental) get on the train here. Being above the 200 Day Moving Average is a big signal for many technical traders, and so I think we should see continued technical buying.
I initially had planned to keep the April $8 calls and exit the trade when we got into the $9+ range, but the move looks to be adding some momentum here and we still have quite a bit of time before these expire. I think that we can see a move even higher and possibly faster, and so I am looking to roll up my calls as long as Implied Volatility is cheap.
Let’s look at the Implied Volatility levels:
Chart from LiveVol
It remains fairly clear to me that we can get leverage with options. Implied Volatility is still low and Realized Volatility is higher than Implied Volatility. This is a good opportunity to stay long calls instead of long stock.
Now comes the math part – if you are determining the strike, you have to think about the R&R for each strike. Let’s assume that I want to exit this trade on a move to $10. There are two terms I can look at for playing for that move – the April 21st expiration and the April 28th expiration:
Screenshots from LiveVol
What we will note here is that April 28th $8.5 calls traded 1,000 times today as someone sold these into the rally. I expect this was to hedge a long position, but my greater concern is the impact on Implied Volatility overall – it’s a bit lower today as a result and gives me an opportunity to buy cheaper leverage. I will need to keep this seller in the back of my mind as someone out there is less convinced that we have a lot of upside, but for now, my focus is on rolling my position higher as I think we have more upside to come.
Let’s dig into the R&R of each strike. If I’m playing for a move to $10, the $8 calls would be worth $2, the $8.5 calls would be worth $1.5, and the $9 calls would be worth $1 at expiration. I was long the April 21st $8 calls which were $0.825 mid-market while the April 21st $9 calls were $0.325 mid-market. The potential return on a rally to $10 is about 1.4-to-1 on the $8 call and 2.1-to-1 on the $9 call. The $9 call has a little bit more upside if this full move happens.
However, there is a trade-off here that needs to be considered. If we only move to $9, the $8 call still gains value and expires worth $1 while the $9 call expires worthless. I’ll quickly dig into the price point where the $9 call starts to perform better (at expiration). For me to spend an equal amount of money on the $9 call instead of staying long the $8 call, I need to see a move above $9.70 by April 21st – a move to $9.70 makes the $8 call worth $1.70 and the $9 call worth $0.70, in each case giving an R&R of 1.15-to-1. The trade-off for being in the $9 call and having more leverage on a big rally is that I make less money on a move to anything below $9.70.
We can do the same analysis for the April 28th $8.50 calls – they are $0.575 mid-market and would be worth $1.50 on a rally to $10, but this time by April 28th. This is an R&R of 1.6-to-1, so it’s a little better than the April 21st $8 calls and a little worse than the April 21st $9 calls for me on a move to $10. There are 2 benefits of going to April 28th – you have one more week for the move to happen and you have a mix between the probability of the $8 calls and the leverage of the $9s. At the end of the day, the negatives for me are the difficulty with execution and the fact that these calls are already in-the-money. Market makers were able to buy those calls on/near the bid, but they are still $0.15-wide options. It’s hard to execute a roll to that strike.
In the end, I wanted to get into a strike that is out-of-the-money and runs well for a move to $10 (or more). I don’t want to set a ceiling on this stock because I would rather let the market tell me when it’s over. While the roll-up I did was not cost-neutral, the option analysis I do is always based upon the cost-neutral roll. If I don’t like the roll on a cost-neutral basis, then I would be better trimming a portion of my position to take money off the table than rolling up my position to take money off the table. And so, I am now into the April $9 calls instead of the April $8 calls and looking to see how the next leg higher goes for me. Good luck to all!
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