I sold HIMX April 9 calls and bought HIMX April 10 calls today.
HIMX has been great for the longs over the course of the last 2 months. I posted about this a couple of weeks ago (HIMX – Back From The Dead?) and again the following week when I rolled my position the first time (HIMX – Gaining Momentum). When I rolled my position on March 17th, the $9 call was about 40 cents out of the money, but this morning, we’ve run to ~$9.50. Given how far these are in-the-money, it is time for me to again re-evaluate and look for a more leverage play if I want to stay with it.
Let’s look at a daily chart to review the game plan:
Chart from FreeStockCharts.com
I want to focus here on the breakout I’m seeing. We’ve been running up with the 20-day simple moving average providing support. We tested that are multiple times in the last week, but continue higher. After a nice run up last week, we formed a wedge with lower highs. Yesterday, the market was able to break out of that wedge and today added confirmation. It seems to me like the next logical move would be a breakout above the recent high of $9.68 and then look for a move toward $11. Timing is a bit of a question, but it looks to me like the momentum is building again, similar to what we saw in mid-March when the market ran from $7 to $8+.
Let’s look at the Implied Volatility levels:
Chart from LiveVol
We are still able to get some decent leverage via options – it’s not as good as it was a few weeks ago, but if we pick up momentum on a rally like we did about a month ago, then this realized volatility will spike as the price spikes – these are both important. If we see the price drift higher, then adding upside leverage is a bit of a waste as a long stock or long call spread position would be a preferred type of positioning. I’m looking for a move toward $11 now, so I like replacing my in-the-money $9 calls with more of the $10 calls.
Let’s dig into the Risk/Reward profile of a 1×2 call spread, as this is the really interesting trade for me. If I sell the $9 call for $0.60 and buy 2 of the $10 call for $0.15, I will collect $0.30 and maintain roughly the same net Delta exposure. If the market rallies above $10.70 by expiration 2 weeks from today, then this trade will break-even – the $9 call will be worth $1.70 and the $10 call will be worth $0.70. If the market fails to breakout and fades back below $9, I am also net better off as I have collected $0.30 while both calls will expire worthless. The profit window for me on this 1×2 trade is below $9.30 or above $10.70. Anything in between is bad for me.
I do believe the logical direction here is for either an acceleration of the move to a price around $11 or a failure back below $9 in the short-term. In either of these cases, I am better off having rolled up my in-the-money calls by trading this 1×2. It is certainly a risk as I am giving up the upside of a smaller upward move, but given that I got into the $9 calls for about $0.30, I am playing with the house’s money after executing my trade today, and I like being in that situation. Those that do not see the same leveraged upside will want to look for a stock position or a longer-term option, but if you are looking for leverage on a breakout, I am a fan of the April $10 call here.
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