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! 

GOOG 1.22.13 Earnings Trade Exit Details

GOOG rallied strong off earnings. Even with the strong rally after the earnings report, we had a winner on our hands well into after hours yesterday. This morning GOOG extended higher, taking the stock above our Iron Condor’s upper break even.

We have two choices here: hold and hope GOOG pulls back into the profit range, or exit now and take a loss. Being this is an earnings trade and we exit the next day on 95% of our earnings positions, we decided it was time to exit after watching price action all morning.

We just covered the GOOG Jan4 740/745 Call Spread side of the Iron Condor @ 3.15. We intend to let the Put Spread side of the IC expire worthless given how far out of the money it is.

Assuming the Put Spread expires worthless (highly probable and optimal scenario), the loss on this trade will be 1.05 based on the 2.10 credit entry fill price. As always, we kept size small and fully intend to place another earnings trade today!

p.s. If you liked this trade, be sure to catch the rest of our Earnings Alerts as a TickerTank member. Sign up 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.

What’s Your Exit?

It’s something that rarely gets covered in the mainstream trading sites, but exiting a trade is just as important, if not more important, than entering a trade. It’s really easy to say “hey, I think Apple’s going up!” and get into a long position, but it’s much harder to figure out when to take gains, or worse, when to take losses. 

In general, you should have an exit mapped out in your head when you enter the trade. This should be a target on the winning side, and a mental stop, or even an actual stop order, on the losing side. These can be somewhat flexible numbers, but the exit strategy should never be “I’ll exit when I’ve made enough money”… ‘cause head’s up, that doesn’t work. If you’re up a ton you’ll feel like you can just keep riding it, and often this turns a big winner into a breakeven trade, or worse. 

On the flip side, we have a tendency to hold losing trades for too long, letting the losses grow as we wait for some divine intervention to save our shirts. It’s OK to take a loss! The best traders take losses just as often as beginning traders… they just tend to take much smaller ones, because they pick their exit points ahead of time. 

So go ahead, think about this as you’re entering your trades this week. Know how you want to get out before you get in, and the odds are you’ll be a lot happier when the trade is over. Good luck! 

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.

Good News, It’s Earnings Season!

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!

Holiday Time Decay

We’re past Thanksgiving, and just now recovering from a Tryptophan-induced 48-hour nap. What better way to celebrate another great holiday than by talking about options, right? 

As the days flutter by towards the end of the year, we’ll pass a number of holidays, extended weekends, and half-days in the market. Besides being a nice vacation for bankers, the hardest-working people out there (kidding!), the holidays also offer some interesting pricing anomalies in the options market. 

When options are listed, they have a finite number of days to expiration, and this number of days, plus the option’s price, moneyness, and implied volatility work together give us an estimate of “theta”, or the rate at which the option loses value with the passage of each calendar day. NOTE: We’re saying “calendar” day, not trading day - this makes a difference! 

Weekends are calendar days, so it stands to reason that options lose more value over the weekend due to decay than during the passage of a regular trading day. It turns out that holidays are also calendar days (despite our usual reluctance to do anything productive during those days) so they have to be counted in options pricing also. 

Said plainly, options lose more value over a three-day weekend than over a two-day weekend, so if you’re a seller of options, sometimes it’s nice to slip in Friday morning and put in an order, knowing that you’ll get four full calendar days of decay (counting Friday!) before you have to think about the prices again. 

This doesn’t mean you should rush to be a seller every holiday weekend, nor does it mean you should avoid buying options during Yuletide. It’s just another pricing factor you should be aware of when you trade. As always, more knowledge makes you a better trader!

NTAP Earnings Trade 11.14.12

TickerTank Earnings Trade Alerts Members received this trade alert at 2:07pm EST.  We are sharing this just before the close to give you an idea of what you receive as a member to this product that members have literally called “AMAZING!”.

We filled the trade below @ 0.37 credit.

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Below is what we intend to do with NTAP into today’s earnings.

We also may work a few NTAP Nov12 24/31 Short Strangles @ 0.45 Limit (credit) as an expected move play, but have yet to decide if we feel it’s worth the risk.  If you are looking for an expected move range play, that’s what we favor.

Earnings Trade Candidate: NTAP    

Easy to Borrow (ETB): yes

Liquid Options: plenty of OI & volume, bid/ask spread of approx 15 cents

Offers Weekly Options: N/A, Nov12 options expire this Friday

IV differential: approx 3.3x, 135% front month IV vs. approx 40% historical IV

Current Price: 27.35 

Expected Earnings Move: +/- 2.50 

Expected Move Range: 24.85 - 29.85 

Trade Strategy:

Selling (to open) NTAP Nov12 25.50/26.50 Put Spread @ 0.33 Day Limit (credit)

Bull Put Spread Legs (per spread):

Buy 1 NTAP Nov12 25.50 Put (debit from account)

Sell 1 NTAP Nov12 26.50 Put (credit to account)

Max Potential Gain: $33 per spread if NTAP expires above 26.50 

Max Potential Loss: $67 if NTAP expires below 25.50 

Break Even: 26.17 

Explanation: NTAP has been pounded hard since it began fading off September 21st high of 36.31. The stock found short term support in the 28 area, but recently dipped below and has shown buy side interest in the 26.00-26.50 area. We think NTAP is oversold at these levels, and are positioning our earnings play based off that assumption via a moderately bullish Bull Put Spread.

With a break even of 26.17 (assuming 0.33 fill), we are giving ourselves a little room to be wrong.  This allows us to play our directional assumption a margin of error, which we are comfortable risking capital on.  Either way, this is not a make or break trade since, as you know, we keep size very small when trading earnings.  

Here’s a 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.