Cleaning Up My Portfolio Before Options Expiration Friday

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Options expiration: In tonight's video, we're going to go over all the trades that we made on Monday, November 16th. So we're pretty busy today. It's expiration week as most of you know. That means we're starting to take off things that either don't work or are close to making money, are making money but now we don't want to risk assignment on a lot of stuff.

As we get closer to expiration week, this is usually when we want to start taking things off. Kind of these last couple days, we don't want want to let anything run until Thursday, Friday this week. That's when your risk of assignment on anything that's in the money, so any long options or short options that are on the money, that's when they carry the biggest risk for your portfolio.

Today we're pretty busy like I said, taking things off that didn't work out for the rest of the month and then also getting into some new trades, kind of some fresh blood for the portfolio.

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First trade here is Solar City. Solar City was a stock that we had for earnings, didn't work out with the earnings trade, and so we're seeing ... Tonight in the video I'm gonna use these embedded charts here so you guys can see kind of what we're looking at with Solar City again. It's all right on the platform, but the stock had a huge move after earnings and just continued to move down.

Never moved back up into our range so unfortunately, this is one of those that moved against us post adjustment. We did try to adjust the strategy, but it didn't end up working out. Took a 5.74 loss on this trade which hurts but we stayed small. We only had one position on so it didn't hurt us big dollar wise with the overall portfolio.

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AKAM is another one that we had that didn't work out as far as an earnings adjustment we kept the month. We had a lot of trades that did work out this month. We had Pandora and GoPro that all came back around and reduced some of the loss from earnings. But AKAM didn't work in our favor either.

Again, you can see stock opened up low from earnings and then just continued to move down after that. Most of that downward move came from the last couple days with the general market moving down as well. The new trade that we entered today had a new position in COP. This is a trade that we talked about on the strategy call with the lead members last night on Sunday.

Again, we're trying to get into some of these trades that are a high probability of success trades and also trying to give ourselves a little bit more of a bearish outlook on some positions. This one is a call credit spread. We're selling the 55, buying the 57.5 which is $2.50 away and that gives us an overall credit of about $62.00 on each of these.

Now, this is still a fairly small position, but we are doing a couple of extra contracts just to again, start to use up some of the capital that we have in our portfolio. I like the trade in in COP. Again, with the 55 strikes in stock trading around 53, 54 right now, it's playing the downside move in oil, and I think that's what we need for our portfolio.

Whether oil continues to move lower or not, it will be seen in the next couple of days, but we need some extra bearish positions in our portfolio, and this fits the bill Same thing with BABA, so Alibaba's another trade that we're getting into. A little bit smaller contract size but still the same width.

We sold the 82.5 calls and bought the 85 calls. Give us about 78% chance of success and same bearish outlook that we have in Alibaba. Taking in roughly the same credit that we're taking in with COP. Again, this is just trying to use some of our capital elsewhere. So not forcing everything into one or two different positions but trying to kind of spread these things out over a couple of different securities here.

Next trade that we got into was a strangle in Yahoo. I like this trade a lot because implied volatility's in the 71st percentile. Gives us about an overall percentage of profit of about 65% on the outside. Usually, with these strangles we end up winning a lot higher than that. Our win rate on strangles is up in the high 70's.

That's because we end up taking this thing off once we've reached about 50% of the credit, so we'll look to take this thing off when it reaches about $1.40. That's usually what we like to take off for strangles. Now note, that this strangle is gonna act more like a straddle because our strikes are so close together.

With a typical strangle maybe your sell option's a little bit further away. This thing is going to act more like a straddle because our strikes are so close but the stock today, when we entered this trade, was trading around 32.5. I don't know where it closed, yeah it closed about 33.

So it was trading kind of in between the range, and that's why we did the strangle on either end. So we sold options on either end, 32 and 33 but again, our credit moves our break even point out by about $2.70 on either end. That credit that we took in is that two dollars ... Yeah, $2.70 moves that break even points out just that much further on either end.

That's really what we're looking for is our potential range here in Yahoo. Again, just trying to play something a little bit neutral, maybe a little slightly bearish until now that the stock's rallied up a little bit but still high probability. Another closing trade that we had is in XLF. So XLF was a call credit spread.

We had the 23, 24 call credit spread. Honestly stock just never moved in our favor. Our ETF never moved in our favor, buying it back today for less that full or max profit or max loss. Max loss would be buying this back for about $1.00. That's the most that this spread can trade for. It's the width of the strikes.

So today to buy it back before expiration, this thing is going to go to a value of $1.00, so there's no point right now in holding this position and losing that extra amount. So took at 2.85 loss on XLF. Also closed out of our CROX strangle that we had for earnings. We had a nice little earnings trade in CROX, bought that back for $57.00 debit today, took in a $53.00 profit on that.

Small profit in CROX but we did that drop in implied volatility and really after they had moved their earnings a couple of times, the stock didn't move from the time they announced earnings until about today when it started to rally up just a little bit.

Everything that we had was centered around the 10 strike, and you can see, although they had a lot of volatility the stock ended up basically where it started at the beginning of the month. We had a nice little trade here in CROX and again we would have liked to see a little bit more out of this trade, a little bigger premium drop but now that were getting close to expiration; it's just time to start cleaning up some portfolio stuff.

All right so two earnings trades that we got into today, first is in HD which is Home Depot. Took in a nice big credit of $375.00 on each of these iron butterflies. Now Home Depot and Walmart which are the two earnings trades that we have, both announce earnings tomorrow before the open.

This trade takes in, even after buying the extra long options, takes in a total credit of 3.75 which gives us a potential profit of about 68% probability wise with the earnings tomorrow and gives us just enough room to get the expected move. Now, of course, we're still doing the small allocation, but that high implied volatility rank for this earnings trade is really what is juicing up these options.

Now notice, we're doing an iron butterfly which is selling the options that are right for the money. The 121 calls, 121 puts on either side and then what we do is we go out an even distance, about $7.00 on either end, and we are buying options on either end and those options are fairly cheap compared to the options that we sold here.

The 121's on either end which is much more expensive. The options that we're buying are fairly cheap. It's cheap protection, and because the stock is plus $100.00, it just costs a lot more to carry a margin position or a naked position in something like this so was using these cheap options here to limit our exposure, give us a risk defying profit and loss diagram.

That allows us also to control our position size in case this thing does happen to move against us. Now I like the Home Depot trade, but I also like the Walmart trade just as well. Walmart is a much lower priced stock. It's trading around $58.00 today, and so we went ahead because implied volatility was much higher than Home Depot, went ahead and went even more aggressive and did the straddle.

Just basically the at the money straddle in Walmart here. Again, same probability of success because of the pricing and it should end up being a nice, good trade. Again, our credit of about $2.00 gets us outside of the expected move here for Walmart. You can see Walmart's been crushed in the last couple weeks with a lot of announcements that they've had coming out.

We'll see what happens with earnings, but implied volatility is juiced up for this stock. Again, our break even points are going to be $2.00 higher and $2.00 lower from where the stock is trading right now. Typically, Walmart isn't a huge mover around earnings, but we'll see what happens tomorrow when they announce.

It's going to be one that the market's going to be looking at really, really closely and I know a lot of investors are going to be following. Those are the two earnings trades that we had today. Like I said, a busy day of both closing, entering and earnings trades. As always if you guys have any questions at all, please ask me 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.