3D Systems Gives a Gift

 | Jul 08, 2014 | 12:09 PM EDT
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The strategy doesn't work often, but when it does it is like getting a birthday present months in advance.

Back on July 1, I resigned to essentially closing my long 3D Systems (DDD) call position. Looking back to the daily chart, the huge move on July 1 was a trigger or alert point for many traders. The price movement on the day was frenetic. As the day wore on, we finally witnessed a huge fade along with a huge spike in volume. For many momentum traders, this is a huge red flag. It was for me. But my calls had moved so far into the money, I took a different approach rather than just selling them.


3D Systems (DDD)
Source: StockCharts.com


I held July 19 $55 calls. The stock was trading some $10 above the strike price and even though nearly three weeks remained until expiration, there was simply no time value associated with the options. They were trading for nothing more than intrinsic value. Selling a call for nothing more than intrinsic value sometimes feels a bit like a loss. The RSI on the stock had turned over slightly, but the uptrend support line was firmly in place and momentum still strong. Rather than sell the calls, I simply shorted the stock at an average of $64.33 figuring I would net $5.83 on my calls ($64.33 - $55 - cost of calls). Then, something happened. Momentum names starting to lose it once again.

Yesterday, DDD lost its support of price only a day after all the secondary indicators broke down. I had the anticipation of opening a box that may or may not have something inside for me. Today, I found out the box did contain a very nice gift. 3D was hit hard this morning and suddenly my long-calls-short-stock strategy picked up steam. The calls, which were once nothing but intrinsic value, are now full of time value. I was able to cover the stock and sell the options with a combined value of $10.80 (the value of the option plus the gain in the short sale). After I subtract the $3.50 I originally paid for on the calls, I am left with a gain of $7.30.

While this may seem like a lot of work, it really isn't. Normally, I just hold these positions and they will clear out of the account at options expiration. In this case, I was sitting on a gain of $7.30 rather than the $5.83 I thought I was going to take in. That's a fairly significant increase in my eyes. But in all fairness, it won't be quite $7.30 as there was some carrying cost on the short position in DDD. But overall, it was a huge positive on a day like today, where some recent buys are getting stopped here for losses and other gainers have also pulled back to stop out prices.

I usually get about one of these per year, so I suppose I don't have any short-stock-long-call presents to look forward to until at least January. But who knows, as the market seems set up for this strategy to work a few more times. We saw it in the May-April timeframe as well.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
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