BBBY Earnings Trade w/ Strangle Strategy

Download The "Ultimate" Options Strategy Guide

Earnings trade: In tonight's video we're going to go over our only opening trade for today, which was our earnings trade in BBBY. We were able to get into this trade a little bit earlier today, and did that on purpose so we could make sure we get some fills and to get the alerts out everyone in a timely fashion.

I think we got pretty good pricing on this trade and it looks like it should be a winner based on where the stock is trading after hours. After already announcing earnings after the close today.

Related "Earnings Trade" Resources:

earnings trade

Here are the particulars on the trade. We went ahead sold a strangle around the market, and we went ahead and did the weekly options for BBBY. The tag here, as you can see, we did say weeklies.

Just remember that when we tag it and say weekly's, we also are going to tell you exactly which weekly contract we're going to sell. In this case, it was the June 4. And so what the June 4 means is that it's the fourth week in June that those contracts expire, or this week. It's the frontest contract that we're going to sell.

Start The FREE Course on “Earnings Trades” Today: When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Click here to view all 10 lessons ?

Again, we've got a video tutorial inside the membership area that tells you how to use these weekly expiration tags. If you want to watch that video, just search weekly expiration tags, and you'll be able to pull that right up.

Of course, we're always going to go with the front most contract that usually has the most volatility built in. It's going to see the biggest, quickest time decay and volatility crush that's going to happen in the contracts.

In our case, we went out to $74.50 on the call side and $67 on the put side. Collected a nice $1.09 credit, so that moves our break even point $1.09 out on either end. Both above and below our strikes on the call and put side.

Here's the set up here. Looking at BBBY, you can see the stock has a good history of seeing an implied volatility crush around earnings. It's pretty reliable to see it, and most of the time the stock doesn't have a huge gap.

It moves, it has a little bit of a gap, but it's not a gap of $10 or $20. It's just usually a normal earnings type of event where the stock kind of moves after the announcement.

In this case, we are playing the stock, or we played the stock just slightly directionally bullish, but it didn't matter because we were able to get our strikes so far out of the money that it should work out in our favor.

Again, assuming that everything goes according to where it's trading after hours. This is where our position is after hours with the risk profile here. You can see the stock is trading right about $68.75, so the stock's trading right about here.

It closed the day right about here at $70.50, $77 or so. You can see it's trading lower after the announcement but our strikes and break even points are all the way down here at $66 and all the way up here at $75.50.

We've got a lot of distance between ourselves and the market and judging by the fact that the stock hasn't opened that far down in after-hours trading, it should be a pretty reliable, profitable trade for us tomorrow.

When we look at the trade tab again, what we try to do is take where the stock closed today, which is about $70.34. Which is right kind of in this ball park here, and we want it to move out by the expected range on either end. We want it to go down by about $3.50 and up by about $3.50.

You can see we went a little but higher than that, in some cases a little bit lower than that. The whole idea here is that we're trying to move outside the expected range because the expected range of about $3.30 to $3.50 is about a 68% probability range.

What this is saying is that there's a 68% chance that tomorrow when Bed Bath and Beyond opens, that they are going to be within $3.30 up or down from where it closed. We want to be outside of that range, that gives us a high probability of success trade, and we should end up making some good money on this trade.

Again, that's the only trade we had today. Please be on the look out for the closing trade alert for BBBY tomorrow morning early. Hopefully, we should see the stock open inside of the expected range and trade somewhere where it's closing here in the after-hours market.

As always, if you guys have any questions or comments, please add them right below 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.