CMG Earnings Option Trade

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Earnings trade: In tonight's video, we're going to go over all the trades that we made on Tuesday, July 21st. Big earnings day for us again, getting into a lot of new earnings trades. We'll cover that here in a second. We did have one earnings trade that we got out of from yesterday.

We had the Iron Condor in IBM. Basically what happened is IBM actually opened up towards the lower end of the expected move here and it really is one that we could've adjusted, but we had a working order, as I was thinking through adjustments, to get out an 80 cent debit. 

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earnings trade

One of the things I might sometimes do like this just places an order that puts me at a small loss or a small profit or breaks even and just see if that order gets filled as I'm working through the process of possibly making an adjustment. Because these things can move pretty rapidly during the earning season, right before earnings and then right after earnings.

Prices can be all over the map. We were able to get out at an 80 cent debit, taking a small loss of $38 dollars. For me, it just wasn't worth continuing the trade, just to maybe make back another $38 dollars. It's still a lot a risk that was out there and we maybe could have reduced our risk by $100 dollars or $150 dollars, we'd still be leaving $200 plus dollars of risk for the rest of the week.

Like I said, IBM opened up outside the expected move, just a little bit. Our short strike was at 165, which was about there, so the stock gave us a bleep of a moment where it was trading inside of the expected range and that gave us an opportunity to then go ahead and close out the trade. Implied volatility did drop, which helped out overall, but the move in the stock was actually a big disappointment on my part.

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We did have another trade that we closed out of today. Our iron butterfly that we had in TLT, our only August position that we have remaining. This is just an automatic exit trade that we had working, so as always when we enter some of these short premium strategies, we'll go in and place a good till canceled or GTC order to get us out at our profit target.

This one just hit, so we didn't have to do anything for it. It wasn't a trade we went in and actively adjusted or managed. We just let our working orders take care of it and it automatically got us out today at a 370 debit, so we locked in a nice $133 dollar profit on TLT. With TLT, as with a lot of things that has happened over the last week, is that implied volatility has gone crazy down, right?

You can see how fast this trade has worked up. This is a trade that we put on about two weeks ago, and it traded all the way for August expiration, which is out here, but since the stock has pretty much-created side ways and implied volatility is all but basically crashed over the last three weeks, that really helped solidify this position as a pretty quick profit. Good to get that trade off.

We had three new earning trades that we got into today. It's going to get even more crazy tomorrow. There are so many different things to trade out there. Before we get into these earnings trades, I want to cover Apple real quick and just very briefly. The reason we did not get into an earnings trade in Apple, because implied volatility is below the 50th percentile.

That's it, there's nothing else about it that we didn't like or not like, it's very liquid, there's no doubt about it, but implied volatility is not favorable. I got probably 16 or 17 emails today from people saying why aren't we trading Apple? We need to be trading Apple. We don't need to be trading Apple. There are a lot of other things out there and if implied volatility was higher like it was back here when we made earnings trade in Apple, or maybe like it was back here when we made an earnings trade in Apple, I would have traded it.

Right now, it's not as high as it's been historically, so there's nothing that we can do. We have to stay systematic. I would have loved to trade Apple, but implied volatility is just not high enough to make a trade and we have to stick with our rules, okay? The first trade that we got into is GoPro, GPRO. As always, with all these earnings trades, we're doing just the weekly's, so the front in those contract in all of them.

The July 4 means it's the July options and the fourth week in July, so the fourth Friday in July is what that tag means. We got a video tutorial about that inside the membership area for those of you who are new that just joined this week. What we did in GPRO is we went out to the 70-72 call spread, so we went all the way up to 70 outside the expected move and down to 50 and sold the 50, 48 credit put spread below the market.

Took in a nice credit of $53 dollars on each of those. Really our goal with GPRO is to get the expected move and give us a little bit of a cushion. The stock was trading up around 62, right at the close of the day and implied volatility right at the 50th percentile when we sold it, so it's right there meeting our perimeters to do that.

When you look at the actual underlying trade again, the stock had an expected move of a little over $7 dollars, so our strikes at 50 and 70 are way beyond that expected move on either end. Give us a little more room on the downside, just because the downside had a little bit more protection and the pricing was a little bit better, out just a little bit more. Overall it should end up being a pretty good trade.

Right now in after hours trading GPRO is trading just a little bit higher, about 6287, is where it's trading at right now in after hours. It should be a pretty good trade tomorrow, we should make pretty much all that premium back very quickly in the open. The other trade that we got into today is a straddle in Microsoft. In Microsoft again, we sold the weekly options. The 47 call and the 47 put took in a nice credit of $2.33 cents.

The reason we were able to do the straddle in Microsoft was implied volatility was very high, it's above the 70th percentile and because the stock is a lower priced stock. I generally like to do this on stocks that are lower range, lower priced. Stock right now is about $47 dollars so carrying the margin for a day on a $47 dollar stock is not like carrying the margin for a day on a $500 or a $200 dollar stock. It's just not going to be that expensive.

In our case we were able to do the straddle because implied volatility was really high and the stock was basically a mid range $50 dollar stock or so.
You can see here that implied volatility really high on Microsoft. The stocks been all over the place historically with earnings, so we definitely have to watch out for that. It's going to be a big mover and a big jumper.

Then again, as we look at the trade tab, you can see that we tried to do everything right around where the stock closed the day at 47, so that's exactly where we put our strikes. The expected move was $2.33 cents. Again, that's about where we took in our credit, so $2.31 cents versus $2.33 cents, the market is perfectly priced. There's lots of liquidity, that's why it works out.

Right now after hours, stock trading down to around 45 and some change, 45 1/2 or so, which is pretty good, so that puts us just inside of the expected move for what we took in. You can see the stock right now is trading right about here, our break even points are just below 45 so that works out well in our favor. As long as the stock stays in this range between now and the market open, we should end up well.

The next stock that we got into is a trade in Chipotle. Chipotle has been one that has Needless to say burned us before in the past, but we cannot shy away from that. It's just probabilities, at one point we're going to make some money on it and I think this is a good trade for us this week. We did really, really wide iron condor and Chipotle gave ourselves lots of room for the stock to move.

We sold the 740, 745 call spread way above the market and the 610, 605 put spread at well below the market, well outside the expected range, so 740 and 610 on the charts gives us a huge range to work with. You can see that the stocks had a huge run of just heading into earnings, but now our expected range because of implied volatility is basically at the highest level it's been in the last year, is all the way up here at 740 and then all the way down at 610.

You can see we gave ourselves quite a big window for this stock to move after hours and around earnings. Now when we look at the trade tab, again we're giving ourselves plenty of room from where the stock is right now. We wen tall the way out to about the one standard deviation level on each end, so we sold options at about the 15 delta, or about the 15% probability of being in the money. That's basically how we structured this trade. We want to give ourselves more than enough room for the stock to move after hours.

Right now, stock in Chipotle is trading up just a little bit after hours, but not far enough, so we are sitting right in the middle of our range and avoiding any kind of ridiculous trading that happens overnight. I don't see any chance that this thing is going to get anywhere close to our strike prices, so again, it's going to be a really, really nice trade.

I'm glad we got into a pretty good trade here in Chipotle for earnings. Again, probabilities were guided, you just have to let them keep going and keep making those trades, okay? As always I hope you guys enjoy these videos. If you have any questions or comments, please let me know. 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.