STX Earnings 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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Both STX and CREE were interesting to me for an earnings strategy today.  I chose STX because there is more liquidity in the options…tighter bid/ask spread leads to less slippage on entry and exit. 

Earnings Trade Candidate: STX

Easy to Borrow (ETB): yes

Liquid Options: yes

Offers Weekly Options: N/A (expiration week)

IV differential: approx 2x, 117% front month IV vs. approx 55% hist IV

Current Price: 28.40

Expected Earnings Move: +/- 2.45

Expected Move Range: 25.95 - 30.85

Trade Strategy:

Selling (to open) STX Apr12 25/26/31/32 Iron Condor @ 0.38 Day Limit (credit)

-AND-

Buying (to open) STX Apr12 25/26/27 Put Butterfly @ 0.12 Day Limit (debit)

Iron Condor Legs (per spread):

Buy 1 STX Apr12 25 Put (debit from account)

Sell 1 STX Apr12 26 Put (credit to account)

Sell 1 STX Apr12 31 Call (credit to account)

Buy 1 STX Apr12 32 Call (debit from account)

Butterfly Legs (per spread):

Buy 1 STX Apr12 25 Put (debit from account)

Sell 2 STX Apr12 26 Puts (credit to account)

Buy 1 STX Apr12 27 Put (debit from account)

Max Potential Gain: $126 per spread if STX expires at 26.00 (max profit price point)

Max Potential Loss: $74 per spread if STX expires at or below 25 or at or above 32

Break Even: 25.36 lower b/e, 31.26 upper b/e

Explanation: IV in STX is nice & high going into this afternoons earnings event.  This allows us to get wide on the Iron Condor while still meeting our “acceptable credit is no less than 33% the widh of the spread” criteria for Iron Condor strategy.  With STX at the top of a range, we have a bearish bias going into earnings.  With that in mind, we are adding a Butterfly to the mix in order to enhance gains in the event our bearish bias is accurate.  If it is not accurate but STX stays in its expected move range, we still have profit potential all the way up to 31.26 which is a comfortable 40 cents above the top end of the expected move range.

Here’s an image of what this spread looks like on a risk plot profile:



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.