Another earnings trade was sent to members before the close today. Today’s play was in OPEN. Information received can be read below, feel free to ask questions.
We have a live one today. OPEN reports after the bell, and not only are the options liquid, but the implied volatility (IV) levels are approx 2.5x historical IV. The only downside is the stock is hard to borrow, but I am comfortable proceeding with a small earnings based trade regardless.
OPEN is trading at 49.00 with an expected earnings move of 7.00. This gives it an expected move range of 42.00 - 56.00. Feb IV is 120%, Mar IV is 83%, and historical IV is around 45%.
I looked at several stratgies, and the one I went with is similar to the WYNN trade a few days ago but with a butterfly on the lower end as well. My earnings trade is as follows….
Sold OPEN Feb 35/60 Strangle @ 1.00 credit (sell one feb 35 put, sell one feb 60 call)
Bought OPEN Feb 32.50/35/37.50 Put Butterfly @ 0.15 debit (buy one feb 32.50 put, sell two feb 35 puts, buy one feb 37.50 put)
Bought OPEN Feb 55/60/65 Call Butterfly @ 0.50 debit (buy one feb 55 call, sell two feb 60 calls, buy one feb 65 call)
This results in a credit of 0.35 per spread, which you will keep if OPEN expires between 37.50 and 55. Profits increase significantly the closer OPEN expires to either the 35 or 65 price points, which mak one or the other Butterfly profitable. The breakevens are 33.55 and 62.65, allowing OPEN to move 2x the expected move in either direction before this strategy starts losing money.
This strategy makes a lot of sense to me. I think there is potential for a big move in OPEN (bigger than expected), and this strategy allows me to profit if that big move occurs. If that big move doesn’t occur, it’s still a profitable trade.
OPEN will have to move 31.50% lower or 27.90% higher to make this trade a loser. That’s possible, but not probable which is exactly how I like it.
Keep in mind this trade has multiple legs and has potential to be heavy on transactional costs depending on your rates. If your rates cut into the $35/spread minimum potential profit too much, consider doing something else.
An alrnative trade we like is the Feb 40/42.50/55/57.50 Iron Condor @ 1.00 (buy one feb 40 put, sell one feb 42.50 put, sell on feb 55 call, buy one feb 57.50 call).
Good luck if you decide to play it. Enter at your own risk, earnings trade are not for the faint of heart.