How To Place An Earnings Option Trade w/ BBBY

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Earnings options trade: In this video, we want to go over specifically the new earnings trade that we had in BBBY. Today is January 8th. We had two orders that went through the market, one opening and one closing. Quickly just to cover the closing trade, we bought back our FXE credit call spread that we had above the market.

And as FXE continue to fall lower, this thing started to decay in value. And you can see these are all the way down to February, so we bought them back at nearly as cheap as they’re going to be between now and expiration. There’s no point in holding it for another $5. A quick little $18 profit on that trade, but that’s not what we want to focus on here tonight.

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The opening trade that we have tonight's in BBBY and that’s Bed Bath & Beyond. They had earnings that were reported after the close today. This alert was sent out before the market closed, we got into the trade before the end of the day and what we did is do a strangle in the weeklies. And with earnings trades, we want to trade as close to the event as possible, and in this case, it was the weekly options that expire tomorrow.

We’re only trading options with one-day left in expiration, but these weekly options had all of the volatility priced in. They were the ones that are going to go through the earnings event, so they were the most active, had the best pricing and that's why we wanted to trade them. Now, we did the 85 call above the market, and the 74 put on the market. A combination of those two sells gave us a $77 credit on all of the strangles that we sold, just that one.

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Here’s the setup in BBBY. You can see the stock has had a pretty good run actually, so it's kind of interesting where the earnings ended up which I’ll show you here in a second. But the stock had a pretty good run and had had a pretty good run since roughly October, but implied volatility has remained high. And we noticed historically that BBBY continues to see a really strong and very quick drop in implied volatility after earnings.

Now, the same thing holds true that it’s a mover. It's a stock that tends to gap up and gap lower depending on which way it’s going with earnings. There's no shortage of differences here Bed Bath & Beyond, but we do know that implied volatility will drop. And currently before earnings, implied volatility was up in the 89th percentile, so extremely, extremely high implied volatility, just makes for an excellent trade setup.

With our strikes that we had selected, we had chosen the 85 calls and the 74 puts. That put our breakevens just about here on the charts and the 85 calls which are just off the chart to the topside. You can see wide breakeven points on this trade and I like how the trade was setting up.

When we go into the actual trade tab, and you can see the different strikes that we selected and how far away we were, you know that the 85 strike was all the way up here, it had a lot of volumes and open interest today, and same thing down here, lots of volume and open interest today for the put side, and we’re trading just the weekly options which only have about a day left to go.

Now, what’s interesting about this is that the stock has already announced earnings and is currently trading at about 76.40 or so or 76.50. It did announce earnings and they weren’t as favorable as everyone had expected, so the stock has dropped about $3 after hours, but this is great news because as long as it opens in that same range, then we should have a pretty nice profit come Friday morning because the expected move on this earnings trade was about $4.

When we initially entered the trade, remember that the stock was trading at about $79 or so, 79.5 and what we did is we moved out on either end just a little bit further than $4 on either end just trying to get outside of that expected move while still taking in a nice decent little profit.

In this case, it looks like it should solidify and become a nice little trade and add to the piggy bank here with earnings trades that we’re going to continue to make more and more of as we get through the season. But this is a magnificent look at where we placed our strikes and the expected move versus the actual move in the underlying.

Here are the profit and loss diagram and you can see it looks very much like a very normal strangle, only this time, the stock is already trading right here at 76.50 or so, so it’s trading towards the bottom side of our strangle, but we’ve got a lot of room. We’ve got the actual room all the way down to about 73 for the stock to trade, so it can double the move it already made overnight, tomorrow and we’d still be okay, we still have a chance to make a nice decent profit on this trade.

It looks like it should be a good trade for earnings, but that’s a splendid long video tutorial on how we place that trade and how we selected strikes just going out further than the expected. That's always key for me, is to go out a little bit further than expected and you get a higher probability trade and still take in some real premium. As always, if you guys have any comments or questions on these trades, please ask them right below in the comment section below this video. And 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.