We sent the following Earnings Trade Alert to Earnings Alert Members at 3:14pm EST. The AAPL trade filled @ 1.80 credit, and the NFLX trade filled @ 1.35 credit as noted.
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Today’s top earnings trade candidates are FFIV, AAPL, NFLX, & SNDK. As you might imagine, we could not resist trading AAPL like we couldn’t resist GOOG yday. We chose the same strategy we used with GOOG, but went a little wider and accepted a little lower credit. This will increase our probability of success while also keeping our risk defined and capital requirements low in this high dollar stock.
Aside from the AAPL trade we are sharing in detail below, we could not resist getting a little extra risky with a Short Strangle play in NFLX. Why would we do this? Well, the 179% implied volatility on the Jan4 weeklies vs. 55% hist IV translates to a 3.25x IV differential. That’s juicy and we had to put a little extra risk on the table today as a result.
We sold the NFLX Jan4 80/120 Strangle @ 1.35 credit. Just one, nothing big. The Buying Power Effect (BP Effect) is approx $1,390, which means the probability of losing more than $1,390 is extremely low. The strangle puts us 2x outside the downside expected move and approx 1.6x outside the upside expected move.
As always, we are simply sharing what we did. Follow at your own risk.
Earnings Trade Candidate: AAPL
Easy to Borrow (ETB): yes
Liquid Options: solid OI & volume, wide bid/ask spread of 5-15 cents
Offers Weekly Options: yes, Jan4
IV differential: approx 2.7x, 95% front month IV vs. approx 35% historical IV
Current Price: 513.10
Expected Earnings Move: +/- 31.50
Expected Move Range: 481.60 - 544.60
Selling (to open) AAPL Jan4 470/475/550/555 Iron Condor @ 1.75 Day Limit (credit)
Iron Condor Legs (per spread):
Buy 1 AAPL Jan4 470 Put (debit from account)
Sell 1 AAPL Jan4 475 Put (credit to account)
Sell 1 AAPL Jan4 550 Call (credit to account)
Buy 1 AAPL Jan4 555 Call (debit from account)
Max Potential Gain: $175 per spread if AAPL expires expires between 475 & 550
Max Potential Loss: $325 if AAPL expires below 470 or above 555
Break Even: 473.25 lower b/e, 551.75 upper b/e
Explanation: When selling Iron Condor’s into earnings, we look for a credit equal to or greater than 30% the width of the spread on an IC that gets 1x the expected move range. In this case, we have the opportunity of getting a credit of 35% the width of the spread (1.75/5.00) on an IC that puts us approx 1.3x outside the expected move.
The greater than 1x width of the IC profit range coupled with the psychological strength of the price points of the short legs (475 & 550) makes this a trade we are willing to risk some capital on. As always, we are staying small in size given this is a high risk Earnings based trade strategy.
Here’s a risk plot profile of the Iron Condor and a chart of AAPL showing the profit range (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.
p.s. You don’t want to miss another one of our trades, so be sure to sign up for our Earnings Trade Alerts here!