Here’s the trade we sent to Earnings Trade Alerts members at 3:20pm EST today. The trade filled @ 0.85. Hopefully strategy prevails and we have another winner. The heart always pounds extra hard when selling Strangles into tech earnings!
Another tough call today. With liquid names like SBUX & LVS and not so liquid names like LNKD & PCLN, there are quite a few options. We initially decided to stick with the super liquid LVS, but ultimately couldn’t resist the lure of trading LNKD into earnings.
Earnings Trade Candidate: LNKD
Easy to Borrow (ETB): yes
Liquid Options: plenty of OI & volume, did/ask spread of 10-20 cents
Offers Weekly Options: yes, Nov1 (expire tomorrow)
IV differential: approx 3.2x, 175% front month IV vs. approx 55% historical IV
Current Price: 106.40
Expected Earnings Move: +/- 9.25
Expected Move Range: 97.15 - 115.65
Selling (to open) LNKD Nov1 90/125 Strangle @ 0.80 Day Limit (credit)
Short Strangle Legs (per spread):
Sell 1 LNKD Nov1 90 Put (credit to account)
Sell 1 LNKD Nov1 125 Call (credit to account)
Max Potential Gain: $80 per spread if LNKD expires between 90 & 125
Max Potential Loss: theoretically unlimited, but max probable loss is $900
Break Even: 89.20 lower b/e, 125.80 upper b/e
Explanation: A Short Strangle into earnings on a stock like LNKD is not for beginners. This trade requires that one have plenty of capital in your account, and that one is willing to stomach a potentially large loss. We like it because the upper break even resides at recent highs resistance and there is support at the lower break even which may hold the stock in the event the report is poor.
The break even to break even range of this Short Strangle puts us approx 1.9x outside the expected move range, which we may need every bit of in a stock like LNKD. Anything can happen here.
A solid defined risk alternative to this trade is the LNKD Nov1 90/95/115/120 Iron Condor @ 1.80 Day Limit (credit). This puts the break evens just outside 1x the expected move range, but still requires one to be willing to stomach a max potential loss of $320 per spread if LNKD moves outside the expected move range.
Here’s a chart of LNKD noting the expected move range (black lines) and profit zone of this spread (purple lines & green oval):
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.