Profit Management on ARO

I had traded a Aeropostale straddle a few days ago just before earnings were released. Yesterday, ARO beat earnings expectations by a mere $.01. However, the stock has jumped up 8.39% today and that has put my ARO straddle in profit. The thing with options is that once you are ITM, managing your profits and capturing as much as possible is a skill too. It is something I am trying to develop and I want to share what my thought process is for this particular case.

Review of original trade:
Bought 5 contracts each of 36 strike calls and puts with Sept expiry.
4.30 net debit per share, total net debit of 2175+24.95= 2199.95.
The Calls cost me $2/contract and puts $2.35.

Below is an intraday chart of ARO as of today:


After this move, my positions are worth:
The Call is at 3.70, and the puts at .75.

I made a killing on the calls but clearly the loss on puts hurt my position a lot. The reason is that I had expected implied volatility to rise along with sudden price movements. Unfortunately, for whatever reason, implied volatility fell. In any case, I am in the money.

On the daily chart, a consolidation is already happening and a pull back may be possible. So I have drawn the trendline which will serve as a guide to me. If the price breaks below that line, I will sell some of the calls and capture the profit. In fact, I have already sold 2 of my 5 calls to neutralize some of my delta and also capture partial profits in case of a pull back.

The puts are still as is. I will hold on to them for about a week and hope that the implied volatility rises or that the underlying price pulls-back significantly in which case I can trade away the puts for only a minor loss. As for the rest of the calls, I will hold them and wait for the price to keep going up so I can make a killing in that way. Preferably, the latter happens because the delta on the puts is negligible (meaning that price movements will have little impact on the puts) while the delta on the calls is now above .7 (meaning for every $1 move in underlying price, my position rises by 70 cents/share).

After trading this position, I also realize I was too late in getting into this position because implied volatility was too high. This is where my excel spreadsheet would have helped and found better trades.


Update 8/28//09

I am now completely out of my ARO position. I sold the rest of the long calls at 5.41 and sold the puts at .50.

My total profit, including commission on this trade was $380. I had a 17% return on the trade while in the same time, the stock went up around 12%. Pretty good trade considering I did not even have to know the direction.