DLTR FDO Earnings Play — UPDATE

• Posted by DynamicHedge
• on July 22nd, 2010

Above is chart from July 7th post (Click to enlarge in new window)

Current chart (Click to enlarge in new window)

I outlined how I was managing this trade here.  I reduced my size into earnings because I feel the trade probabilities were reduced.

I prefer this spread from the short side, and I’ve been playing it for the last few weeks.  Yesterday I reduced my position down to 1/6 size because FDO was reporting earnings after the close.  My trading plan for this spread allows for six units of capital.  I came into the morning with three units short and I took two units off at the close, leaving me with 1/6 of my total position size at the close.  FDO had a disappointing earnings report after the close and traded down almost 8% in the following session, while the short side of the spread,  DLTR, only traded down 3%, thus producing the gap in the chart and divergence in the spread.  Reducing the units of capital into an unpredictable event allows me to continue trading the spread without the handicap of a large open loss.

I still wanted to trade the spread, and I feel that there is still edge left in the trade.

In the long run I feel that the spread trading in this upper range is a great opportunity otherwise I would have stopped out of the position entirely.   I will stay away for a few days and let the probabilities to stack up before I get back in.

The blue arrow notes where I got my signal to get back in.  The blue horizontal lines are areas where I have or will be working the position.  I’m back down to relatively small size again.

This spread is pretty tame, which is why I feel confident discussing it live on the internets.  I’d call it a walk in the park compared to some of the fire-breathing, chainsaw juggling spreads out there.

Next time to check in with this spread is mid-August for DLTR earnings.

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