Strangling Profits Out of LNKD

With LNKD trading @ 184 premarket, the probability is extremely high that the May1 165/240 Short Strangle will expire worthless. With that in mind, it’s time to put on our finest Kentucky Oaks apparel and hit the track to continue this win streak!

We filled two Strangles @ 0.78, and two more @ 0.96 for an average credit of 0.87. Couldn’t resist that second round when we saw the pop in price for this Strangle. Assuming this does in fact expire worthless and we realize max profit we will make $87 per spread, totaling $348. Not bad for an overnight trade.

It’s Friday so no trade as usual. Have a great weekend, and be sure to tune in for the Kentucky Oaks today @ 5:45pm EST and Kentucky Derby tomorrow @ 6:24pm EST!

Earnings Trade Alert - FB 5.1.13 after the bell

Earnings Trade Alert members received this alert @ 3:13pm EST today. We filled the Strangle @ 0.25 credit. Get in on the action, sign up now!

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Quite a few earnings trade cadidates today. FB, TSO, & LVS being the best. STX, V, SFLY, & YELP being decent as well. And then there WLT which is supposed to report during the trading session tomorrow which may be the best sleeper play we’ve seen in a long time. All that being said, we’re sticking with the most liquid and opportunistic of the bunch which is FB (as you may have guessed).
 
Earnings Trade Candidate: FB

Easy to Borrow (ETB): yes

Liquid Options: strong OI & volume, bid/ask spread of approx 1-3 cents

Offers Weekly Options: yes, May1 

IV differential: approx 2.55x, 115% front month IV vs. approx 45% historical IV

Current Price: 27.50 

Expected Earnings Move: +/- 2.10 

Expected Move Range: 25.40 - 29.60 

Trade Strategy:

Copy the trade below and paste it into our recommended broker, thinkorswim (adjust number of contracts according to your capital risk preferences).

SELL -1 STRANGLE FB 100 (Weeklys) MAY1 13 31/24 CALL/PUT @.22 LMT

Short Strangle Legs (per spread):

Sell 1 FB May1 24 Put (credit to account)

Sell 1 FB May1 31 Call (credit to account)

Max Potential Gain: $22 per spread if FB expires between 22.00 & 31.00 

Max Potential Loss: theoretically unlimited, but BP effect of $280 per spread is more probable max loss.

Break Even: 23.78 lower b/e, 31.22 upper b/e

Explanation: May1 weekly options expire this Friday and the IV on FB May1’s is approx 115%. That’s a lot of IV a very little duration…a nice combo when trading earnings based strategies.

When trading Short Strangles into earnings, we like to get at least 1.5x outside the expected move range while obtaining a credit equal to or greater than 1% the price of the stock. We are just shy of both objectives in this case, so we took a closer look.

We like the fact that FB is a low priced stock which enables us to sell a few strangles without eating up a ton of buying power. We also feel comfortable being long FB from 23.78 or short from 31.22, so while the credit is somewhat small we decided to risk a little capital on this strategy.

This is a high risk strategy with undefined risk. Follow us at your own risk! As always, we keep position size small on every earnings trade…especially when the risk is undefined like this trade.

Here’s a 6-month chart of FB 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. Furthermore, we ALWAYS keep position size small when playing earnings based trades.

Earnings Strategy: GOOG 4.18.13 after the bell

Here’s the GOOG Earnings Strategy Alert that members received at 2:54pm EST today. Join the Earnings Alert family today!

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Our favorite earnings candidates today are GOOG & IBM. The rest of the names on the potential candidates list we shared in the SNDK exit details email have super wide bid/ask spreads or lack options volume. We decided to go with GOOG…we like the strategic choices better than IBM. Small position, live to fight another day if wrong.

As always, we are simply sharing what we are going to do. Follow at your own risk.
 
Earnings Trade Candidate: GOOG     

Easy to Borrow (ETB): yes

Liquid Options: strong OI & volume, wide bid/ask spread of 30-50 cents

Offers Weekly Options: n/a. Apr expiration is tomorrow

IV differential: approx 2.8x, 84% front month IV vs. approx 30% historical IV

Current Price: 766.40 

Expected Earnings Move: +/- 35.40 

Expected Move Range: 731.00 - 801.80 

Trade Strategy:

Copy the trade below and paste it into our recommended broker, thinkorswim (adjust number of contracts according to your capital risk preferences).

SELL -1 IRON CONDOR GOOG 100 APR 13 800/805/730/725 CALL/PUT @2.00 LMT

Iron Condor Legs (per spread):

Buy 1 GOOG Apr 725 Put (debit from account)

Sell 1 GOOG Apr 730 Put (credit to account)

Sell 1 GOOG Apr 800 Call (credit to account)

Buy 1 GOOG Apr 805 Call (debit from account)

Max Potential Gain: $200 per spread if GOOG expires expires between 730 & 800 

Max Potential Loss: $300 if GOOG expires below 725 or above 805 

Break Even: 728.00 lower b/e, 802.00 upper b/e

Explanation: GOOG has a very wide bid/ask spread which we tend to stay away from, but GOOG is one of the few we give a pass to given the massive options volume and open interest. It could be a huge swing, so we don’t want to sell a strangle. We need defined risk here to feel comfortable, and small size as usual since it’s an earnings based trade. With that in mind, we went with the Iron Condor which gets us 1x outside the expected move range (so it puts us right at both ends of the range) and provides a credit of 40% the width of the spread assuming a 2.00 credit fill. We usually look for a 30% credit on a 1x outside the expected move Iron Condor, so this pricing is favorable.

This Iron Condor gave us a little more wiggle room on the downside All in all, we like it enough to give it a shot.

Here’s a risk plot profile and 6-month chart showing the profits zone (green oval) of the GOOG Iron Condor:

 

 
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.

AAPL & NFLX 1.23.13 after the bell

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.

If you would like to start receiving these alerts with plenty of time to act, sign up for our Earnings Trade Alerts today!

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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

Trade Strategy:

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! 

EBAY Earnings Trade 1.16.13 after the bell

Below is the EBAY earnings trade we filled @ 0.28 credit at 3:23pm EST today.  Members of our Earnings Trade Alerts System received these details before we entered the trade. Sign up today and join the earnings family!
 
Earnings Trade Candidate: EBAY

Easy to Borrow (ETB): yes

Liquid Options: decent OI & volume, bid/ask spread of approx 2 cents

Offers Weekly Options: n/a, Jan expiration is this Friday

IV differential: approx 2.4x, 84% front month IV vs. approx 35% historical IV

Current Price: 53.12

Expected Earnings Move: +/- 2.93

Expected Move Range: 50.19 - 56.05

Trade Strategy:

Selling (to open) EBAY Jan13 49 Puts @ 0.28 Day Limit (credit)

Naked Put Legs:

Sell 1 EBAY Jan13 49 Put (credit to account)

Max Potential Gain: $28 per contract if EBAY expires at or above 49.00

Max Potential Loss: $4872 per contract if EBAY goes to zero, but the more probable max loss is the $660 buying power effect per contract.

Break Even: 48.72

Explanation: We have been looking to get long EBAY for a while now. At this time, we would be comfortable owning the stock in the 50.00 area.  Today’s after the bell earnings event has caused inflation in EBAY Options Implied Volatility, giving us an opportunity to sell Puts well out of the money and still get a respectable credit. We decided to take this opportunity to potentially start a long position in EBAY.  Worst case, the stock tanks and we’re long from 48.72 cost basis which is a price we are comfortable with. Best case, EBAY expires above 49 and we keep the entire credit obtained for selling the 49 Puts.

In the event we are forced to go long, we have sold an amount of contracts that would get us 25% towards our intended capital pledge towards EBAY stock.  We would immediately sell Calls against the shares, and continue acquiring shares based on the circumstances.

This is not a beginner strategy, so ignore this trade if you are not 100% comfortable being long 100 shares of EBAY from 48.72 cost basis per contract sold.

Here’s a risk plot profile of the Naked Put:

 
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.

To Spread, or Not To Spread

Today is apparently a day of asking, then answering, our own questions. If you’ve ever sold a spread at earnings, you know exactly why we’re asking this question. You’re happy to take a credit, but you can’t help but think about how much more you’d have made if you had sold a naked call or put instead of covering it with another option on the back end. This is a tricky question, and we’re going to put some words to work in answering it. 

Just like our post earlier today about monthly vs. weekly options, this comes down to a weighing of risk and reward. Opening to yourself up to possible unlimited risk is always something to be carefully considered, so be sure you fully understand what you’re doing before you make the decision to do so. It can be worth it to pull the short option back a couple strikes and leave it uncovered - even with the additional capital required to hold the trade, it’s usually true that your return on margin is higher, and you have a much higher probability of profit. 

On the downside (or upside, har-dee-har-har), if you’re wrong about magnitude or direction the short option can be a painful one to close. There’s always that nagging belief that, if you wait just another day, the underlying may reverse course and allow you to exit with a smaller loss (or even a profit), which can leave many of us taking a much larger loss than we should because we couldn’t pull the trigger and exit. One of the hidden benefits of a spread trade is that it provides a natural stop order - a point at which your losses are capped, which provides a great deal of assistance in making rational decisions about exits. 

As with all your trades, think carefully about your risks before deciding how to respond to an opportunity. If you’re interested in trading earnings, you should sign up to receive our Earnings Trade Alerts - we’ll send you daily updates each earnings season! 

Weekly vs. Monthly

Earnings season means our blog followers get nice written forays into the world of “trading theory”. It’s not really a science, because it doesn’t have dinosaurs or tiny black holes, but it’s the closest we get to deep, theoretical thought during the month (it’s no surprise that a bunch of business majors aren’t exactly Einstein and Bohr). 

With that said, we ask this question: Is it better to trade weekly options during earnings season, or monthly options? 

The answer isn’t easy, but we’ll explore the choices. When trading weekly options, there’s a serious advantage to debit strategies, because those options cost much less than their monthly counterparts. This is great! But, there’s a tradeoff - if you’re wrong on the direction or magnitude of the earnings move, there’s no time to recover the trade, you’re taking max loss. 

There may also be an advantage to selling weekly options, in that the payoff comes very quickly if you’re right about direction and magnitude. But again - if you’re wrong, there’s no repair strategy that can save you. 

So the tradeoff is this - do you want your payoff quickly, and if so, is it worth the additional risk that comes with not having a backup plan if you’re wrong? We tend to go with monthly options, because we like the flexibility of adjusting to a situation gone wrong. In our mind, the difference between good traders and poor ones is the ability to make good decisions, and respond to bad results, and we prefer strategies that provide us with at least the opportunity to rebound. 

Whatever your choice, you’re a better trader for weighing the options and making a decision based on risk analysis and reward potential. Now get out there and trade, and good luck!

Why Earnings Reports Matter

This is a really simple blog post - Earnings reports matter because the market tells us they do. We could end this after one sentence and we wouldn’t be wrong (and we thought about it, to make a point), but there’s more to say, so we’ll say it. 

We’re taught in business school that the market is made up of rational investors, consistently making decisions with their best interest in mind, decisions based on universally-available information shared instantaneously with the entire market in a format easy to understand. It turns out that’s not exactly the way it happens. 

When companies report quarterly earnings, it’s usually the first chance investors have to hear first-hand how a company has performed. This information is compared with the public expectations for performance - guidelines and estimates usually provided by the companies themselves in previous earnings reports - and the evaluation then drives investors to react to that information with buying or selling. 

For traders (different than investors!), we recognize periods of increased activity and uncertainly as being nice opportunities for gain. When lots of people are paying attention there are usually many more opportunities to find good trades, so as traders we pretty much follow the volume and implied volatility to find the products we trade. 

For everyone in the market, these moments when information asymmetry (it’s a real term!) is reduced are extremely important, as they provide the bevy of “rational” investors a chance to respond to real information with changes in preference. We try to predict ahead of time what those changes will be, based on the exact same information as everyone else - we use our previous experience to help guide us through decision-making in volatile environments. 

If you’ve never traded earnings announcements before, it can seem a little scary, but don’t worry, we’re here to help. If you have traded earnings annoucements before, then you know what we’re talking about - it’s a ton of fun, but also stressful and occasionally very frustrating (like when a company beats its estimates but the price drops anyway!). 

If you’re in either of these camps, we encourage you to become an Earnings Trade Alerts member, and let us guide you through the season with trade ideas, knowledge, and a friendly ear for the good trades and bad. 

That’s all there is to say about that! 

APOL, What A Tease!

APOL beat estimates, but a revenue miss and declining enrollments in their University of Phoenix locations eventually toppled the initially bullish response to their earnings report. The stock continued to fade lower premarket, and is now trading in the 19.00 - 19.20 area.

After watching price action for the first 45 minutes of trading, we decided it was time to take a loss into this round of buying we’re currently seeing. We just covered the APOL Jan3 19/20 Bull Put Spread @ 0.68, which translates to a loss of 0.34 given our fill of 0.34.  In other words, we lost $34 per spread entered. 

Given this was an earnings based trade, we kept position size small as always. This keeps us in the game and allows us to continue actively trading earnings events. The long term benefit of this style of trading is incredible as it sharpens your skills across the board.

Nothing on the books today.  WFC is to only other possible earnings trade this week, but it’s doubtful the Implied Volatility will be attractive enough to risk capital. It is most likely that we’ll enter our second trade of the season next week.  In the meantime, please do not hesitate to reply with an questions you have about trading earnings with Options.

1.8.13 APOL after the bell

Earnings Trade Alert System members received the following alert at 3:05pm EST today. Sign up now to start receiving our Earnings Trades before Earnings Season is over!

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Earnings Trade Candidate: APOL

Easy to Borrow (ETB): yes

Liquid Options: decent OI & volume, bid/ask spread of approx 7 cents on Jan2 20.50’s

Offers Weekly Options: yes, Jan2 

IV differential: approx 2.6x, 130% front month IV vs. approx 50% historical IV

Current Price: 20.54 

Expected Earnings Move: +/- 1.97 

Expected Move Range: 18.57 - 22.51 

Trade Strategy:

Selling (to open) APOL Put Spread @ 0.33 Day Limit (credit)

Bull Put Spread Legs (per spread):

Buy 1 APOL Jan2 19 Put (debit from account)

Sell 1 APOL Jan2 20 Put (credit to account)

Max Potential Gain: $33 per spread if APOL expires at or above 20.00 

Max Potential Loss: $67 if APOL expires at or below 19.00 

Break Even: 19.67 

Explanation: APOL experienced a significant downside move after earnings last quarter. With that move on the books, a defined risk trade is a must so no Short Strangles or Naked Puts/Calls for us.  

We like the fact APOL has created a bottoming pattern near the 18.50 area and has recently began up trending off that level of support.  We want to base a strategy on this price trending. This Bull Put Spread allows us to play the bottoming pattern & uptrend with max gain at or above the psychological price point of 20.00 and a break even of 19.67, which gives us a little cushion for error.

If you’re in the mood for a little more risk and are comfortable with naked Options (unlike us), the Jan2 18/23 Short Strangle @ 0.50 Limit (credit) is worth a look. You get approx 1.5x outside the expected move range and a credit of 2% the price of the stock. This meets our earnings based Short Strangle standards, but we’re avoiding it due to last quarters violent move as noted above.

Here’s a 1-year chart and risk plot profile of the Bull Put Spread:


 
 

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. Furthermore, we ALWAYS keep position size small when playing earnings based trades.