Quick Profit w: ADBE Earnings Strangle

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Earnings trade: In tonight's video update, want to go over all the trades that we made for Wednesday, June 17th. We had two trades today: one quick close of our strangle earnings trade in Adobe and then another adjustment to our FXE position because FXE kind of had a big move towards the end of the day now that a lot of news is coming out of the Eurozone and Greece and all of this stuff. 

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earnings trade

Let's first go over Adobe, so yesterday we'd entered the strangle around Adobe assuming that the stock was gonna open within a five dollar range, up or down, and we wanted to see a drop in implied volatility, and we really got both of those and a very quick profit on this earnings trade today.

We were able to buy back our strangle in Adobe for a 15 cent debit. Couple minutes after the market opened and took a nice 86 dollar profit on the trade. When we look at the chart here of Adobe, you can see again, the stock opened well within the expected range, didn't really have any big gap, and now that the earnings event has occurred, now the market's a little bit more certain as to where Adobe might go, good, bad, or indifferent.

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Right? Even if earnings were necessarily bad or good or whatever, now the market has some certainty because now this earnings event is beyond us. We saw that good drop in implied volatility which really helped these option premiums drop very quickly, and we were able to take a nice little profit on this trade after the fact.

Then we also had an adjustment today in our FXE positions, so we've got kind of this convoluted FXE position for June and July. We only adjusted the June position. I'll go over this here a little bit more on the trade tab page, but all we did in this adjustment is roll up our PUTs which were at 110. We rolled them up to 111, and we did that by using a vertical credit spread, so with a vertical credit spread order, you're selling that front option which is the 111, and you're buying the back option which is the 110.

Now, in our case, we were already short those back options which were the 110s, so by buying those we're now buying them back and closing out the short 110 position, reestablishing it closer to where the market's trading for a 24 cent credit for each of those, so another 100 dollar addition to the trade. Now, why did we do this?

Well, two reasons: one, we're getting closer to the expirations, so we can make adjustments a little bit more aggressive, but two, today we also saw the FXE start to move higher along with a very quick drop in implied volatility. We want to try to get on a little bit more premium here and take advantage of whatever we can get for these last couple days in addition to trying to get into another position for July.

We didn't have an opportunity to get into that. It didn't fill, the trade that we were trying to get into, so hopefully tomorrow we can fill that position, but we wanted to get into another position in July because now that some news has come out in the Eurozone, we're starting to see implied volatility drop across the board because the markets are a little bit more certain about the expectation.

Things like FXI are starting to see a little bit of a drop. TLT as well, starting to see a little bit of a drop. Across the board in a lot of different areas, we're starting to see a drop in implied volatility, notably in FXE today, going from near the 100th percentile down to the 80th percentile in just one single day. On FXE, this is what our position looked like earlier on the PUT side.

We had the 110s, so you can see we bought these back because they're practically worthless already, so for the next 30 days, they're only gonna give us about 10 or 12 cents of premium and decay. We wanted to, again, just try to maximize what we have left in this trade and by rolling these closer to the market, we're able to take in a little bit more premium and continue to potentially offset some of the cost and potential loss or profit in the trade by increasing our overall credit. That's what we're doing here.

We've got a couple of positions that we still have in the money options for that will try to manage most of those tomorrow. Still need to see a little bit more time come out of those positions before we fully realize what we're trying to get out of those trades, so we realize that we've got positions that are left on the board that are in the money. Believe me.

We're not gonna try to let them go all the way through expiration. We will obviously try to manage all of these trades and close them out, adjust, or roll them as needed so that we take advantage of them before expiration. Hopefully you guys enjoyed this video. If you have any comments or questions, please ask them right below in the comment section and 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.