AMD LEAPS Call Diagonal Exit
Updated: Mar 31, 2022
Discipline is an important concept for trading. In this case, I had an AMD LEAPS Call Diagonal structured (long the 21Apr23 80C and short the 20May22 120C) that I was planning to manage for ~180 days. I entered the trade on 24Mar and exited on 28Mar - a total of 3 trading days in. Why did I exit so early?
Primarily because my hypothesis was disproven, luckily it was early. I was looking for AMD to continue rallying strong out of the 100 base established late April into early March. It very well might continue it's rally, however today (28Mar) we started seeing some weakness and a potential 50/200d MA cross-under (aka the death cross). As an indicator, it's quite applicable to indicies and there is fairly good research on how effective it is.
In this case, I chose to take the risk down (for a small profit) and will look to re-enter when conditions clear up a bit. It's entirely possible that we see a rally out of the 119 handle. It's also possible we see a decline. This style of directional diagonals, is designed to follow the momentum of the market and capitalize on a trend being developed. I still believe the trend may setup, but as of right now it's in question. So despite what I think or my confidence in managing the trade if it were to go against me, there's no reason to here. If I were long AMD stock, it would be a different conversation - but my LEAPS have an expiration and time is against me. Not only do I need to be accurate but I need to be accurate within my window.
With trades like this that show a small profit or loss early on and I see an important trend input that doesn't align with my hypothesis, sometimes it's best to take the trade down and move on. I have other trades on that are producing and there's no reason for me to add unnecessary drag. Fighting every position doesn't need to be the answer.
AMD has fallen over 10% since my exit. It easily could've gone the other way, but the red flags were there and I obeyed my process. When it rebounds and shows strength, I'll conduct another analysis and enter all the same - saving myself from participating in the downside. This is how we out perform the markets - maximize our return potential and minimize our drawdown participation.