Fiat Chrysler (FCAU) is trading higher again this morning, just below $9, and up 36% in the last three months. This has been a superb run higher, and has put our calls in a great spot. So how might we manage this winning trade?
Sell a Portion
One strategy is to sell another piece at $2, and lock in a profit of 207%. Then let the remainder run for even greater upside.
Spread
If you are able to trade spreads, then you might sell another call against your March 7 Call. For example, if you are long 10 of the March 7 Calls, you can Sell 10 of the March 9 Calls for $0.65.
This would leave you with the following position:
Long 10 March 7 Calls
Short 10 March 9 Calls
Having bought the March 7 Calls for $0.65, and now sold the March 9 Calls for $0.65, you have put on the trade for a net outlay of zero cash. You have no risk. If FCAU closes at 9 or above on March expiration, your spread would be worth $2, a profit of 207%. However, the downside to this position is that your upside is capped.
Raising Stops
Because I go for “home runs” when I buy calls and puts, the raising stops strategy is what I will use to manage this position. Rather than selling another piece or spreading off my risk, I will raise my mental stop on the position, which should protect us from giving up most of our gains.
My new mental stop on the position will be set at $1.40, or a profit of 115%. This will allow us to let the position run for greater upside, while protecting us against a big fall. And if the stock, and our position continue higher, I will also raise my mental stop along the way.
There is some downside to this strategy. If the stock were to have a quick fall, we get stopped, and then the stock again runs higher, then this will be a mistake. Also, because Fiat Chrysler is an ADR, it is possible that the stock will drop overnight before we have time to sell. But these are risks I’m willing to take.
Conclusion
Only time will tell which of these strategies is the best for managing this position. However, because the trader who bought approximately 80,000 March Calls has not sold his position and taken profits, I will hold my position and continue to go for greater profits.
If you have any questions about these strategies, please don’t hesitate to email me.