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Roll Celgene (CELG) diagonal up and out

The Celgene diagonal is threatening to have the short call move into the money again.

music selection:  “Seasons” — Chris Cornell

Celgene (CELG) has been on a tear since I opened a diagonal call on it on 15AUG2017.  I’ve already had to put more money in the trade once and now I’m going to have to do so again.  A real case of First World Problems.  My short call (CELG171013C00145000) was within 50 cents of being in the money so I bought it back for 2.48 a share.  Original proceeds were 2.00 a share so I take a 48 dollar short term capital loss of the short call.

I sold CELG171027C00150000 for 2.05 a share.  The trade will be in force for 38 days and yields 24.96% annualized assuming a 78.90 cost basis for my long call.  On net, I’m out 43 dollars to roll this trade.  I have earned another 5 dollars or so in capital appreciation on the long call however.

A total of 15 dollars have been added to the trade since opening (128 gain, 100 loss, 43 loss).  The cost basis is 78.90.  Capital appreciation for the duration of the trade is 12.10 a share.  Over 37 days, that comes out to 128% annualized.  It is still early in the trade and the annualized return is likely to fall as it is improbable that CELG will continue to gain 5 dollars every 6 weeks for the long term.  However, I expect to continue to do well.

Celgene has a fat pipeline of potential blockbuster drugs and a profitable business in several stellar cancer drugs.  The share price should be much higher by the time the long call expires in January 2019.  Because I hold a call to secure the trade instead of shares, I have leveraged exposure to those gains.  With any luck, the short calls will start to generate some net income as well instead of requiring me to put more money out of pocket to stay in the trade.

Devour your prey raptors!

{ 4 comments… add one }
  • Chris B September 20, 2017, 9:17 pm

    I always wondered why diagonal calendar spreads were not your favorite strategy. Harvesting time decay from a semi-neutral position seems like a good plan, but I guess these spreads require constant maintenance. Glad you avoided a margin call.

    • The Lizard King September 20, 2017, 10:23 pm

      Diagonal calls are very powerful but require more monitoring. They also have leveraged downside if the underlying falls. You only want to use them on something you expect to have a long term growth that is both slow and steady.

  • financialfreedomsloth September 21, 2017, 10:00 am

    I agree completely! Which is why I am wondering about your choice of underlying stock. farmaceuticals with ‘pipelines’ have a tendency to have strong fluctuations from time to time. Something I rather avoid with this type of construction. My preference in these cases is something like coca cola …

    • The Lizard King September 21, 2017, 7:26 pm

      I used to run diagonals on PepsiCo and they worked great. I thought this time the strong cash flow and commitment to shareholders would yield a slow steady climb with a few bumps from drug approvals along the way. I can’t say I’m unhappy, I’ve picked up way more in capital gains than I’ve paid out to roll the short calls. Up very nicely overall!

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