Are Adjustments to PCCRCs necessary?

PCCRCs are by nature very flexible trades. I like to say that with them you can play the market in a reactive, rather than proactive way. Most traders look at candidates, create a watch list and wait until the appropriate moment to enter their trades. With PCCRCs you can enter the trade right after the big move, as long as the conditions of volatility and liquidity are appropriate. That is, you react to what the market told you: this stock is going to move. The same way that you enter after the market moved, you can also enter stocks that have move strongly, those that I call “high fliers” because, as Newton would tell you, that body will tend to remain in motion.

But it is also true that an exterior force could be applied to that body and make it change its motion or stop it. The PCCRC allows you to be prepared for that contingency too. Why? Because when an exterior, unexpected force is applied to a stock (like a piece of news), it is likely to affect its volatility, and as you know the PCCRC benefits from increases in Implied Volatility (Vega). When Vega spikes, you can take your profits and run, or you can simply modify your position to benefit from a decline in Vega. I for one, don’t like to play calendars, or condors, or credit spreads or butterflies, but these are exactly the kinds of trades that would collect Vega profits. I just simply opt to exit if Vega gets too high. In fact, during earnings season Vega would increase in most stocks, particularly as they approach earnings. I have found that exiting the trade just before earnings and then opening a new position after earnings (if the stock remains attractive) is probably more profitable than remaining in the same trade through earnings.

Finally, if the stock does remain in motion and hits new highs, well above the strike price of your position, it is fair to consider taking profits. This is easier said than done. Let’s say that you have 10 trades and the only one that is working out is a PCCRC on GOOG, and it is giving you great results and the stock exceeds $700/share. The last thing in your mind may be taking profits. Let’s say that you entered a PCCRC at $660 right after earnings and the rally has given you some profits. You have a -1c, -1p, 2c, 2p configuration would mean sell one of your two calls, transforming the position into a bearish one. The last thing in your mind would be to risk a continued rally in this most favorite of stocks. But it is wise to always take some money off the table while leaving the door open for further gains, either to the upside or to the downside. You could easily enter a bear call spread by selling one of your two $660 calls, but at the same time buying 1 $710 call. This is a credit spread that would remove some of your risk, and give you some cash you can put to work elsewhere. As long as the resulting risk graph meets the litmus test of the “smiley face”, that is, the resulting trade could benefit from upside or downside move.

So you see, you do not have to have a lot of money to trade PCCRC’s, you don’t have to play GOOG, and you certainly don’t need to play any more contracts than the minimum -1c, -1p, 2c, 2p. Adjustments are purely discretionary, of course, and I could just as easily advocate that you stay in the trade until 1 week before expiration, or just before earnings and then decide to stay in the trade by rolling over (1 week before expiration) or simply exit the trade. This should be the approach of traders that have a regular job. There is no point in watching the market daily for an additional buck.

Adjustments are discretionary, but they help us feel the market and react to it, rather than go through complex technical analysis reasons why we should stay in the trade. One of the biggest misconceptions of intermediate level traders, is that they can call the top. Stocks go well beyond their most expected targets some times but some others fall well below expectations. It is ironic, but there is a fear of exiting too early when one trades stocks or other kinds of option strategies. With the PCCRC you get to have the cake and eat it too, as an adjustment at the right time can lock in profits and open the trade for the possibility of further gains in the case of a reversal, or continued rally in the stock. It is all up to you! I’d say lock in your profits whenever you can.

First time visitor? want to learn more about the PCCRC? Please visit older posts, but specially this one where I describe what is in my DVD's and how to get them:

http://stockoftheday.blogspot.com/2007/10/httphomepage.html