Our Earnings Alert System has been quiet, but it’s about to be “game on” yet again. AA kicks off earnings season tomorrow after the bell.
Typically earnings season starts a bit slow. AA kicks the season off, then it’s quiet for the remainder of the week. Next week is when things start to get exciting. The increased trade activity tends to last 4-6 weeks, then earnings season ends and earnings trade frequency fades with it.
We don’t always trade AA earnings, but we always look for an opportunity. If AA meets our strict earnings trade criteria and we like a particular options strategy, we will definitely share it tomorrow. If not, expect the fun to begin very soon.
Here’s to another successful round of earnings trades!
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The two “juiciest” candidates from an inflated implied volatility (IV) perspective are RVBD & CMG. I chose RVBD because the bid/ask spread of approx 0.60 on the front month closest to the money strike in CMG is too wide. This results in too much potential for slippage. RVBD bid/ask spread on the front month closest to the money strike is approx 0.06. MUCH better than CMG.
Earnings Trade Candidate: RVBD
Easy to Borrow (ETB): yes
Liquid Options: yes
Offers Weekly Options: N/A (expiration week)
IV differential: approx 2x, 130% front month IV vs. approx 60% historical IV
Current Price: 27.70
Expected Earnings Move: +/- 1.80
Expected Move Range: 25.90 - 29.50
Selling (to open) RVBD Apr12 25/30 Strangle @ 0.70 Day Limit (credit)
Short Strangle Legs (per spread):
Sell 1 RVBD Apr12 25 Put (credit to account)
Sell 1 RVBD Apr12 30 Call (credit to account)
Max Potential Gain: $70 per spread if RVBD expires b/t 25 and 30 (max profit range)
Max Potential Loss: theoretically unlimited, but max loss of $150 is more probable
Break Even: 24.30 lower b/e, 30.70 upper b/e
Explanation: Assuming a fill of 0.70 (which is currently 8 cents below the current nat price of 0.78), this spread gets us 1.9x outside the expected move on the lower end and 1.7x outside the upper end of the expected move. This gives nice cushion and leads to a high probability of a successful earnings trade. We look for a credit no less than 2% the price of the stock when selling strangles into earnings. In this trade the 0.70 credit is approx 2.5% the 27.70 price point on RVBD, so we are satisfied and comfortable going forward with this.
April options expire tomorrow, so this trade is almost purely based on volatility premium.
Here’s an image of the profit range (green oval) in RVBD:
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.