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Last month I bought four ATM CHWY calls:

  • $50 strike price

  • $1,660.00 cost per contract

  • Expires on 01/2022

CHWY is now at $58.70 and if I sell, I would make about $1,500. I believe it will go up much higher in the next year. I am just wondering if there is a strategy I am missing instead of holding the call. How do you suggest that I play this?

Also, is there a way to mathematically know when the time value is at the rapid time decay region (highest slope change)? In other words, can I just assume a logarithmic base 10 decay?

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    Have you heard of Black–Scholes? That's the first step. Even though the real first step is to understand an investment (or in this case "bet") before entering a trade. – JTP - Apologise to Monica Aug 5 at 15:32
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...can I just assume a logarithmic base 10 decay?

I don't know what that curve looks like so I can't say if that's appropriate. However, theta is non linear and can be easily determined by utilizing an option pricing formula (Black Scholes, etc.).

CHWY is now at $58.70 and if I sell, I would make about $1,500. I believe it will go up much higher in the next year. I am just wondering if there is a strategy I am missing instead of holding the call. How do you suggest that I play this?

There are many ways to play this and which adjustment that you choose to employ depends on the trade offs that you are will to accept. I'll just mention a few.

  • If you're bullish, you'll get the most bang for the buck if you do nothing. Just ride the wave...

  • If you want to book some gains and reduce your money at risk, roll your calls up as CHWY rises. The drawback to this is that it will lower your total delta. In addition, since this is a LEAP, B/A spreads will be wide and slippage will be high.

  • If you're really bullish, when you roll the calls up pyramid them. For example, you could sell your four $50 calls, buy five $60 calls, increasing your total delta, and put some cash in your pocket. This leverage would pay off nicely if CHWY rises as you believe (hope?). OTOH, with a higher total delta, you'll lose more if CHWY drops.

  • If the gain becomes large enough, at some point you can buy a put to lock in some of that gain, creating a hard stop (the new position is a strangle). The disadvantages are (1) the cost of the put is thrown away, lowering potential profitability and (2) put cost is high if implied volatility is high which means much less gain is locked in (CHWY has moderately high IV). Evaluate for viability.

  • Sell shorter term OTM calls, convert to a diagonal spread. This brings in premium, lowering cost basis. The drawback is that it caps your upside and you won't be happy if CHWY blows through that higher OTM strike.

The short answer? What's best depends on what CHWY does in the future. What's my prediction for that?

It is certain

Reply hazy try again

Concentrate and ask again

Cannot predict now

Without a doubt

Don't count on it

Very doubtful

Outlook good

.

.

.

| improve this answer | |
  • Which prompts the question - what % of member will get the magic 8 ball reference? – JTP - Apologise to Monica Aug 5 at 16:38
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    Probably not very many unless it was still on the market for Gen Y, Gen Z and millenials. – Bob Baerker Aug 5 at 16:50
  • At a quick glance, at least one major retailer is still selling them. – glibdud Aug 5 at 23:22

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