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RVBD is down 22% in premarket trading.  As a result, the stock has moved below our Short Put leg on the Apr12 25/30 Short Straddle, and this trade will be a loss.  Our intention is to cover (buy to close) the Apr12 25 Put shortly after the opening bell, and let the Short 30 Call expire worthless.  There is no reason to exit the call as it adds unnecessary transactional costs as the probability of it expiring worthless is nearly 100%.

I have been asked how big I go on earnings based trades several times via phone and email.  It is important to remember that regardless of the fact this strategy is based on strict criteria and applied in a high probability manner, it is still in relation to an earnings event.  You cannot discount the excess risk associated with trading earnings no matter which strategy you use.  I personally use 1-2% of portfolio capital based on max loss (or probable max loss in the case of an undefined risk spread). That said, how much you expose your portfolio from a capital perspective is up to you.

There will be no earnings trade today as it is rare a company that meets my criteria reports earnings after the bell Friday or before the bell Monday.

Remember today is April Options Expiration day (expiry).  If you are a day trader, beware of quirky intraday action until around 11:00am EST when things tend to cool down.  Note yesterday’s intraday price action in the major indices as an example of how wild things can get as Options positions are unwound.

Next week presents a ton of opportunity.  Here’s a few names that we are looking forward to analyzing for earnings trade opportunities: TXN, NFLX, AMZN, JNPR, X, BIDU, UPS, AKAM, DECK, OXY, XOM to name a few.

-Nick Fenton

The email we sent to Earnings Trade subscribers is below.  The email went out just before 2:00pm EST.  We are sharing it with you for educational purposes given the market is closed.

If you like what you see, click here to join today!

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The two “juiciest” candidates from an inflated implied volatility (IV) perspective are RVBD & CMG.  I chose RVBD because the bid/ask spread of approx 0.60 on the front month closest to the money strike in CMG is too wide. This results in too much potential for slippage.  RVBD bid/ask spread on the front month closest to the money strike is approx 0.06.  MUCH better than CMG.

Earnings Trade Candidate: RVBD

Easy to Borrow (ETB): yes

Liquid Options: yes

Offers Weekly Options: N/A (expiration week)

IV differential: approx 2x, 130% front month IV vs. approx 60% historical IV

Current Price: 27.70

Expected Earnings Move: +/- 1.80

Expected Move Range: 25.90 - 29.50

Trade Strategy:

Selling (to open) RVBD Apr12 25/30 Strangle @ 0.70 Day Limit (credit)

Short Strangle Legs (per spread):

Sell 1 RVBD Apr12 25 Put (credit to account)

Sell 1 RVBD Apr12 30 Call (credit to account)

Max Potential Gain: $70 per spread if RVBD expires b/t 25 and 30 (max profit range)

Max Potential Loss: theoretically unlimited, but max loss of $150 is more probable

Break Even: 24.30 lower b/e, 30.70 upper b/e

Explanation: Assuming a fill of 0.70 (which is currently 8 cents below the current nat price of 0.78), this spread gets us 1.9x outside the expected move on the lower end and 1.7x outside the upper end of the expected move.  This gives nice cushion and leads to a high probability of a successful earnings trade.  We look for a credit no less than 2% the price of the stock when selling strangles into earnings.  In this trade the 0.70 credit is approx 2.5% the 27.70 price point on RVBD, so we are satisfied and comfortable going forward with this.

April options expire tomorrow, so this trade is almost purely based on volatility premium.

Here’s an image of the profit range (green oval) in RVBD:

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.

We sent an earnings strategy email out to Earnings Trade Alerts subscribers at 2:17pm EST today.  So far the trade is in profitable territory, but there is still a lot of time before the opening bell.

We’ll share our exit details with you tomorrow. For now, here’s what Earnings Trade Alerts subscribers got via email earlier today…

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I was in Chicago yesterday for a guest appearance on tastytrade as well as to host ThinkorSwim’s Wednesday chat.  I spent the majority of my day travelling today,  and was unfortunately unable to send out the GOOG Apr2 590/595/675/680 Iron Condor I discussed on ThinkorSwim yesterday.  I’m very bummed because based on GOOG’s reaction to earnings it would have been a max gain winner.  That said, there is a TON of opportunity ahead of us!  Expect your first earnings trade Monday afternoon.

I anticipate at three earnings trades per week during the peak of earnings season.  During off season, there will be weeks with no trades and weeks with one or two trades.

Earnings Trades is an email only service at this time.  As noted on the thank you page, we collected a username and password from you in case we build a login for this product.  You cannot login at tickertank.com at this time.  Rest assured the trade related content you will receive via email is top notch.  That said, there may always be room for technological improvements with this product.

One last thing.  I prefer to enter earnings trades as late in the session as possible.  This helps avoid crazy market moves and/or crazy moves in the individual earnings trade stock.  Alerts will be sent between 2:00pm-3:30pm EST.  I understand you need time to read, react, and place the trade if you like it, so I will do my best to email trades out closer to 2:00 than 3:30.

I am excited to have you on board, and thankful for the amazing response this Earnings Alert System has received.  Thank you for your business, I greatly appreciate it!

Happy Trading,

Nick Fenton