This morning we closed out our Bull Put Spread on VXX for a gain of $17 per spread, or a 15% return on capital. It was a trade that took almost three full weeks to come to fruition, one in which we were patient and waited until nearly expiration to close.
We originally identified this trade because of the relatively short time to expiration (a May weekly contract that was about 30 days out) and a breakeven point well below volatility lows. This is the kind of trade that usually pays off, where it takes some rare market action to force us into a losing position. Volatility spikes are common and can happen quickly, but quick drops in volatility are rare when they’re not immediately following a spike upward. Because of this, we felt very comfortable placing this trade and reasonably sure that we’d be able to take a gain.
It’s been a nice run for us here at TickerTank, with 5 winning trades in a row, most recently a modified Short Strangle in TSLA. If you’re already a member you can review this trade, and we’re going to discuss it here.
We identified a security with both a quick increase in price and a quick increase in implied volatility, we decided that a short strangle was the best strategy to capture the premium that comes with an IV increase.
After a couple modifications through the course of the trade we took a nice gain - 18% on buying power effect in one day! It’s not often that a trade pans out immediately, but it’s important to recognize when your opportunity to enter, and then exit, a trade is limited and be willing to make the trade.
This is different from trading recklessly, which we strongly advise against. We’re talking about recognizing when a trade fits your criteria and being willing to take the trade when it presents itself.
Did somebody say home run? The MCP earnings strategy worked out beautifully!
Yesterday we sold to open MCP Jun 5 Puts @ 0.35 credit. The stock is trading 20% higher this morning, and we just covered the Puts @ 0.15 for + 0.20 per contract.
We sold 30 contracts since the BP effect was so low…that’s a nice $600 gross profit overnight. Not a bad way to end the week.
It’s Friday, so no trade as usual. Have a great weekend!
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Today’s top two candidates are MCP & NVDA. There is not enough IV inflation in NVDA to get us excited. On the other hand, MCP has plenty of IV to work with. This is not an expensive stock we’re dealing with, but we are still going to stay small with our earnings based position size.
Earnings Trade Candidate: MCP
Easy to Borrow (ETB): no
Liquid Options: plenty of OI, volume lacking, bid/ask spread of approx 1-4 cents
Offers Weekly Options: yes, May2
IV differential: approx 2.2x, 175% front month IV vs. approx 80% historical IV
Current Price: 5.67
Expected Earnings Move: +/- 0.48
Expected Move Range: 5.19 - 6.15
Copy the trade below and paste it into our recommended broker, thinkorswim (adjust number of contracts according to your capital risk preferences).
SELL -1 MCP 100 JUN 13 5 PUT @.32 LMT
Max Potential Gain: $32 per contract if MCP expires at or above 5.00 on Jun expiry
Max Potential Loss: Probable max loss is the approx $104 buying power effect per contract.
Break Even: 4.68
Explanation: The May2 Weekly Options have 175% implied volatility priced in, but we cannot get enough premium out of the Puts to make them worth selling. Instead, we decided to go out to Jun. The end result is a respectable premium with a cost basis that puts us just over 2x outside the lower end of the expected move range. The 33% ROC on these Jun 5 Puts is 33.5% which translates to a daily ROC potential of 0.75%…solid.
We typically stick with the least duration possible, but in this case we couldn’t get enough premium in the front month and we wouldn’t mind being long shares of MCP from the 4.68 basis so we are putting a small position on into earnings.
In the event we are forced to go long, we have sold an amount of contracts that would get us 50% towards our intended capital pledge in MCP stock. We would immediately sell Calls against the shares, and continue acquiring shares based on the circumstances.
This is not a beginner strategy, so ignore this trade if you are not 100% comfortable being long 100 shares of MCP from 4.68 cost basis per contract sold.
Here’s a risk profile of the Naked Put and a 1-year chart noting the multi-year low at 4.70 (just above our cost basis):
NOTE: Trading Options into earnings includes financial risks and may result in loss of capital. Do not consider an earnings based Options strategy unless you understand and accept the capital risks associated with the trade.
marcthetrader asked: Q. How do you copy and paste the trade in TOS? I have tried several times with no luck.. Thx!!
Here’s a video where I show how to paste —> http://www.youtube.com/watch?v=W59AyemU-ys
To copy, right click the trade in the order entry screen and click “copy”.