Our Wide Strangle Option Trade In AAPL

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Strangle option: In tonight's video we are going to go over the slew of trades that we made here today on Wednesday, August 12th. It was a pretty busy day. Mostly surrounding earnings, but the market was a little crazy this morning. Most stocks were lower this morning and did higher, but that gave us a really good opportunity to see a really nice pop in implied volatility kind of across the board on a lot of things.

It seemed like a lot of stocks on our watch list really seen the pop above that 50th percentile and actually go even much higher than that. We had an opportunity today to not only make some earnings trades, which worked out really well, but we had an opportunity to also trade some regular, longer term positions that should work out well next month.

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We're actually going to start tonight by looking at the adjustment trade that we had the one loan adjustment in FXI. This trade's very similar to what we actually did a couple days ago in FXI. We're just continuing to roll down our short calls, try taking as much premium as we can on the FXI trade and try to recenter our strategy as much as humanly possible.

Now, again, the whole idea here is that if the stock is moving against you, it's not that we necessarily are going to make adjustments to make money. That's obviously a byproduct; if that happens, great, but right now at this point it's really more about cutting your losses and reducing your risk. Stop the bleeding before you try to save the patient, as I always say kind of relating it to like a doctor on an operating table.

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When we actually look at FXI, and this is your chart of FXI, you can see stocks just moving a little bit lower. Again, has been over the past couple days. That's really because the market's moving and now we're getting closer to expiration so we have to be a little more nimble and quicker with our adjustments.

Now we have the short 42 calls here. We rolled them down closer to where the stock is right now. Still gives us a nice range in case the stock comes back and rallies back higher for us to, potentially, make less money or earn some of our money back.

This is actually a look at FXI. This is our September position, so we're going to look at it kind of in two pieces here. This is our September position; exactly where we want it to be. The FXI position in September is working out beautiful, the stock is trading right at 40, and we've had this thing on.

We've already seen some decay and already made about $60 on this side of the trade. Now when we look at the August position, not the September position, you can see it's kind of this unbalanced iron condor that we have, so we've made some adjustments along the way.

What you can see that we've done is we've shifted some of the risk in the trade to the top side, so the risk is that we could actually lose a lot more money if FXI just shoots higher by a dramatic amount, but I don't think that's going to happen. It would have to go above really 45, 46 in the next eight days.

We've shifted some of that risk to this side while also reducing our risk to the lower side. That's why we keep rolling these spreads down from 45, 46, 42, et cetera, and we keep rolling them closer to where the stock is trading right now. That's basically what we're doing; we're shifting risk from one side of the trade to the other.

At this point, if FXI continues to move lower, and again this doesn't have any of the other positions that we've had on here, and closed out for a profit, so this is just what's remaining. Then we should be okay kind of in this range. We'd love to see the stock move just a little bit higher from here; just maybe about another dollar higher and then kind of sit in that range.

But right now I still like the adjustments that we've made. It's definitely helped reduce risk on the August position. As far as closings trades go, just real quick, we closed out of our automatic closing ware got hit in DIA. This was our call credit spread above the market that we sold a little while ago.

The 180/181 call credit spread. Bought it back at a little over 50% of max profit. Again, exactly what we teach, exactly what we tell everyone to do. Took a nice little $52 profit on this. With DIA, again, it was just that early move down this morning, and I wasn't even really around when this order went through and got filled.

I was playing with my daughter and inside the house here and just got an alert on my phone that it went through. Sent out the alert to everybody. It just really kind of happened mechanically. It wasn't anything that we necessarily did. Now, the next trade that we closed out of today was our two earnings trades.

The first one was in Alibaba, which is ticker symbol BABA, and then we had FOSL. We closed both of those trades shortly after the market opened. Nice little profits on each of those. In Alibaba we closed it out with a nice $81 profit. FOSL was a little bit higher at $122.

But really, the name of the game here is that implied volatility has dropped on both. Alibaba had a nice move lower, but didn't see the move outside of the expected range. For FOSL, we saw a nice move lower in the stock. Not, again, outside the expected range, but look at this drop in implied volatility and this is really what we want to see. Right?

When we look back, historically, at some of these trades, you can see this thing is a really good stock to trade when earnings are around because of that hard, fast drop in implied volatility and that's where you get that premium decay. That's where you get all of your profit on a trade like.

So implied volatility going from around the hundredth percentile down to around the 36th in one day is a huge, huge move. Again, the stock really didn't move all too much, so we were able to take a nice little profit off the table. As far as new trades go, we had a couple new earnings trades in Cisco and KSS, which is Kohl's.

The first one in Kohl's we went ahead and did the strangle right around where the stock was trading. It's a very tight strangle, so we did the 62-1/2 and the 60 put, so very, very tight in there. Took a nice big credit of $2.72. The reason that we did that with kss, and here's the chart here of ...

Oop!s K-S-S. Here's the chart here of kss, is that implied volatility was really high, so it was up in the 76th percentile heading into earnings. Again, that's very, very high, even historically speaking for this stock over the last year. So we wanted to do something like a straddle.

We prefer to do, actually, a straddle, but you can see the stock was trading right about 61-1/2, so there was no opportunity for us to trade a 61-1/2 position or strike. You can see the stock was basically closed almost exactly in between where the two strike prices are that we traded.

Instead of picking on side, either the 60 or the 62-1/2, and kind of going directionally on either side we decided just to do a very tight strangle around the market at 62 and 60. That credit that we took in gave us more than enough room with where the stock was trading to get outside of the expected move.

Hopefully, this should turn out to be a nice little trade. I think they announce earnings tomorrow after the market opens. The other trade that we got into today was in Cisco. In Cisco, we did do the straddle right over the market. That was the best trade that we could do. It is selling the 82 calls and the 82 puts.

Took in a nice big credit of $1.42. Cisco did announce earnings after the market closed and is trading up just a little bit; up to around 28-1/2, up to around 30 or so. Looks like this trade actually should be a nice little winner, but again, the credit that we took in of about $1.42 got us well outside of the expected move, which is $1.27.

That credit on the straddle was really nice and, again, got us outside the expected move. Really, because implied volatility was, again, very, very high, lower priced stock around $28 or so, so it didn't cost a lot to carry the margin for that type of a trade. With Cisco, here's where the stock is trading kind of after hours.

Just a little bit higher, about 28.64, so it looks like it should be maybe around a 90, $100. We'll see where it actually opens up, but it looks like it should be another good earnings trade in Cisco as well. As far as other trades that we got into today, there are four new trades that we got into today.

These are more of our position type trades. We had a credit call spread in OIH. Now the reason we did this is we already have a position in XOP, but still a little bearish on oil. Everything seems to be going down with oil right now, so in OIH we sold the September 34/35 call spread for a 23 cent credit.

Now this was, again, a really good example of taking in enough premium based on the probability of losing because in OIH, and you can see just the downward move that it's had right now, rise in implied volatility makes it a good candidate. With OIH, we basically were able to sell options right at the probability level that gave us the credit.

So when we traded this thing today, the probability of being in the money at the time we traded it was around 23, 24%. You can see it's gone up just a little bit, but that gave us a credit that was equal to the probability of losing on the trade, which is always what we preach about getting fair and equal pricing on these trades.

Looks like it should be a pretty good trade. Went against us just a little bit today by like $5, but it should be a fairly good trade. I would make this trade hands down every single week if I could. Time and time again, out into the future. It's just a great, very simple trade. Doesn't cost a lot of money either.

The other trades that we did today were a little bit more aggressive in nature. We did a couple other trades in EEM, IWM, and Apple. So in EEM, which is an emerging market ETF, we sold the nice wide strangle; 37/32 puts for a nice $70 credit.

Now the reason that we're doing this with EEM is because it's an emerging market ETF; it shouldn't jump around all too much, but it's got nice, high implied volatility. It's up around the 64th percentile, and although that isn't in the 70s or 80s, it's definitely higher than where it's been historically over the last eight or nine months here.

It's a little bit higher than where it's been and I definitely think, given the low price point of the stock, a $35 stock, it's not too much margin to carry this position. Now, when you look at where we actually placed our strikes in EEM, and you can see that here when it loads up, that we actually placed our strikes a little bit outside of the norm.

Meaning that we didn't go an equal distance on either end. I kind of skewed this strangle just a little bit to the down side. I did that on purpose because I don't know exactly what's going to happen here with emerging markets. They've definitely been moving lower.

There's really no sign that they're they going to necessarily turn around and we've got other positions that are skewed towards the other side. So in this case we skewed our strangle just a little bit towards the bear side. We did our 32 puts down below the market, at about the 15% probability and then we came in a little bit closer on the call side and did the 37s around the 26% probability of being in the money.

Again, just giving ourselves a little bit of skew to the downside. I mean, look. There's no real signs that this thing is going to stop falling, but if it does it'll likely move sideways before it moves higher and that's really what we're hoping for. Not a quick and immediate rebound, but more of a sideways type action and a drop in implied volatility.

With IWM, we just did a very basic iron condor around the market. Implied volatility, briefly this morning, was actually up around the 60th percentile. Since come back down. We did the 124/126 call spread, the 109/107 put spread in IWM.

This is a good little position because I like that it gives us some exposure to kind of the broad markets here. You can see that IWM actually had a nice recovery today. It was down much, much more earlier in the morning and then basically recovered all of that loss.

And implied volatility, although it looks low now in the 37th percentile, it was up in the 60th earlier today when the markets were kind of down this morning. So we did get a little bit of movement already in implied volatility with IWM and just isn't reflected in the chart, I guess.

Did a nice wide iron condor around the market. We weren't trying to be too fancy here. Just trying to get another position on ... This is, again, a really good position to take if you have an IRA or a SEP account or something like that, or a Roth, because it's a very easy position.

It doesn't require a lot of margin. It's risk defined. It should be a nice little position. It's already starting to move just against us a little bit on the top side, but I'm not too worried. This is going to be a long term trade. Should have about a chance of success around 78, 80% or so.

All right, and then finally, we got into a nice wide strangle in Apple. This is a really cool trade because we don't often have an opportunity to trade Apple. Kind of middle of the month, no earnings, no dividend risks, no none of that. We did the September 125 calls, the 95 puts in Apple.

Took in a nice big credit of $1.53. Again, because Apple had really high implied volatility earlier this morning, that gave us an opportunity to sell premium that we wouldn't normally be able to sell. And with Apple ... Let me just let this stuff load up here.

With Apple, we tried to go a little bit wider than usual. It does tend to be a stock that moves a little bit faster. It's a big name stock. There's a lot of people who are always interested in Apple. So we wanted to give ourselves a little bit more extra room on either end.

You can see here with Apple, again, nice high implied volatility. Much higher earlier this morning when it was kind of trading at the lows around 110, but we sold options at 125, which is all the way up here so it would have to basically have to recap and restep everything that's lost over the last month.

And then down at 95, which is kind of off the charts down below where the stock is trading now. So got really good pricing on it, I think, and got into a nice position in Apple. Lots of liquidity, so this probably nothing very hard to get into. You know, 20,000 contracts traded today on the 125 strikes.

On the 195 strikes, almost 3,700 contracts traded. So there's lots and lots of liquidity for Apple, which makes it really, really easy to trade and get in and out of. All right, hopefully that was good. Hopefully, you guys enjoyed going through all those trades.

I know that was a lot, but thanks for sticking with me and bearing with it. If you have any questions at all on these trades, as always please add them right below so that we can get answers to everybody and all the other members that are looking at these can see questions and obviously help everybody at the same time. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.