A strategy idea for options trading investors.

The recent market surge has been a rising tide lifting virtually all boats. Unfortunately, the tide can only climb so far before needing some type of correction. At times it corrects through price by dropping back in value. Other times it corrects through time by consolidating sideways and digesting the recent gains. When I think a correction is looming I like to make tactical adjustments to existing bullish trades in order to help lock-in gains or reduce risk. The long Deere (NYSE: DE) Aug 80 Call mentioned in last week’s Deere Looks to Plow Higher is ripe for just such an adjustment.

Suppose you originally purchased the Aug 80 call for $5.50.  At a current value of $7.60 your unrealized profit sits at $210. To reduce the risk of the position yet leave ourselves open to additional profits we could roll into a call vertical spread by selling the DE Aug 85 Call for $4.00. The new position is a long Aug 80-85 call spread with a net debit of $1.50 (5.50 – 4.00). In making such an adjustment our max risk in the position drops from $550 to a mere $150. We also cap our reward at $350 which allows for an additional $140 in profits. As an alternative traders may have considered selling the DE Aug 90 Call instead of the Aug 85 call option. Since the Aug 90 call is further out-of-the-money it would have allowed for even more potential profits, but would have reduced the risk by a smaller amount.

Source:  MachTrader

At the time of this writing Tyler Craig had no positions in DE.

Follow Tyler Craig on Twitter@TylersTrading.