Max Potential Gain: $45 per spread if CRM expires between 39 & 48
Max Potential Loss: theoretically unlimited, BP effect of $440 per spread, 2x expected move loss of $140 more probable max loss.
Break Even: 38.55 lower b/e, 48.45 upper b/e
Explanation: Keeping it simple here with a Short Strangle. This spread allows us to get just above 1.5x outside the expected move with only one day of duration, all while receiving a credit a little over 1% the price of the underlying.
A 2x expected move pop or drop in CRM would result in a loss of approx $140 per spread, so we’re basing our max potential loss on that more probably number rather than the BP effect.
This spread makes sense to us because we would be happy comfortable going long CRM from 38.55 cost basis or short from 48.45 cost basis. Follow at your own risk, and remember we size down on all earnings plays. We will do a 5 lot max here.
Here’s a chart of CMR showing the profit range (green oval), as well as the risk profile also noting the Short Straddle we considered:
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.
If you’re trading at earnings, you’re principally concerned with the magnitude of directional movement post-announcement. Now, in english: you’re worried about how much the stock your trading will move once earnings results come out. There are a few good ways to predict this, most notably by using the super-powered trading platform you’ve got on the screen in front of you (we prefer thinkorswim).
If you’re not using a super-powered platform, or if you just like doing a little math in your head, we’re going to teach you how to get a “best guess” for expected move without doing anything other than a little addition and dividing by 2.
Start with the at-the-money strike price for the options in question (these are the options that expire just after earnings). Now, take the price of the at-the-money call and the at-the-money put and add them together (this is called the at-the-money straddle). Next, take the price of the call with the next highest strike price (out-of-the-money) and the price of the put with the next lowest strike price (out-of-the-money). Add them together, and you have an out-of-the-money strangle.
Last, add the prices of the at-the-money straddle (call + put, same strike price) and the out-of-the-money strangle (call + put, one strike out-of-the-money) and divide by two (you’ve taken an average). This is the amount that the market expects the stock to move up OR down by options expiration, and is a reasonable guess at the expected earnings move (the earnings move is likely expected to be a little less than this if there is time between the earnings release and expiration).
So add the average to the current stock price, then subtract it, and consider that range your “one standard deviation” range - this just means that, about 68% of the time, the stock will finish earnings within this range. You can trade accordingly - by trying to set your breakeven points outside that range (if you’re selling options) or inside that range (if you’re buying options).
AA kicks off earnings season after the close. Is there an earnings play? Let’s analyze based on the current 10.25 price point on AA:
Oct2 Weekly 10 Straddle @ 0.75
Oct2 Weekly 10/11 Strangle @ 0.40
(0.75 + 0.40)/2 = 0.575, which is the approximate expected move in either direction
Now that we know the approximate expected move, let’s see if there is a solid Options play.
Oct2 Weekly 9/10 Bull Put Spread @ 0.22 is no good; break even (b/e) is not outside expected move and price on less than one third the width of the spread.
Oct2 Weekly 11/12 Bear Call Spread @ 0.10 is no good for the same reasons; b/e is not outside expected move and price on less than one third the width of the spread.
Oct2 Weekly 9/10/11/12 Iron Condor @ 0.32 is a worthy candidate. It’s not quite one third the width of the spread (0.33), but close enough to consider. Lower b/e is 9.68, which is right at the lower end of the expected move. Upper b/e is 11.32, which is 50 cents above the upper end of the expected. We like having more room to the upside than downside because we feel there is more upside than downside here.
Oct2 Weekly 10/11 Short Straddle @ 0.40 looks nice if you are comfortable with no defined risk. Lower b/e is 9.60, upper b/e is 11.40…both outside the expected move. Probability of success is about 50%, which is not quite as high as we like when going with a naked strategy.
Lastly, it may be worth it to take a stance on AA here. Given we are in the bullish camp going into this earnings release, our “stance trade” of choice is the Oct2 Weekly 10/11 Bull Call Spread @ 0.40. That said, we will likely play the Iron Condor if the market allows it to fill before the close.
LNKD reports after the bell today. There are still opportunities to trade earnings regardless of the heavy selling pressure we have seen in broad markets as of late. In determining what the best LNKD earnings based trade might be, let’s start by taking a look at LNKD vs. QQQ 60 day charts.
LNKD 60 day:
QQQ 60 day:
As you can see, LNKD has been showing relative strength in comparison to its relative indice, the Nasdaq (represented by QQQ). LNKD has been range bound between 97.00 & 110 as of late, while QQQ has dropped sharply from 59.50 to 55.10. Considering the way LNKD has held up amidst this downside move, it may be safe to say there is more risk to the downside than the upside in response to earnings. We’ll keep that in mind.
Let’s calculate the expected move using our usual strategy…
current price of LNKD is 97.00, meaning it’s closest front month strike is the Aug 97.50.
Aug 97.50 Straddle is currently @ 18.25 ask
Aug 95/100 Strangle is currently @ 15.75 ask
(18.25+15.75)/2 = 17, so the expected move is 17 at the moment.
97.00+17 = 114.00 max upside expected move
97.00-17 = 80 max downside expected move
Now that we have that data, let’s see if there is a trade worth making. Given the recent volatility increase in the market we are not comfortable with any naked Options positions, so we will focus on trades with defined risk.
Aug 115/120 Bear Call Spread @ 0.80 is no good because the credit does not amount to at least one third the width of the spread in the strikes (5x0.33=1.65).
Aug 77.50/80 Bull Put Spread @ 055 is no good for the same reason (2.50x0.33=0.825)
What if we combine a Bull Put Spread and Bear Call Spread to make an Iron Condor?
Aug 75/80/115/120 Iron Condor @ 1.90 works! The credit obtained for selling the spread exceed one third the width of the 5 point strike spread. The max profit range on the spread stays at or outside the expected move, and the break even to break even range is outside the expected move. Let’s take a look at the Risk Plot Profile of this spread…
The spread may or may not work, but that goes for any trade you make. The fact is, the probability of success is high given the wide range obtained by selling this spread. The probability of LNKD staying between the max potential gain price points of 80 and 115 into expiration is 58%. The probaility of it staying between the two break even price points of 78.10 and 116.90 is 64%. Not excellent, but at least you put the odds in your favor.
We are staying away from this trade for the simple fact we aren’t comfortable enough trading LNKD yet. Regardless, this information is valuable and if you are cozy trading LNKD into earnings this is a nice weapon for you to take into battle.