Earnings, Iron Condors And Bearish Trades

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Bearish trades: Today, we’re going to go over all of the trades… Yes, all of the trades that we made today. I know there was a lot of them and I know people were emailing me back and forth because this is probably one of the busier days that we’ve had in the last couple of months and it was just a combination of expiration coming up and closing out of trades and then earnings and high volatility, so there’s a lot to go through in tonight’s video, so bear with me as we get through them.

As always, I think one of the most important things that we do here that differentiates us from so many other websites and services out there is that we do take the time to go through each and every one of the trades that we make, so that you guys know exactly what we’re doing, opening, closing, adjusting, hedging, earnings, whatever, and I think that really helps out. And as always, just bear with us. This is going to be a little bit longer video tonight, but we’ve got so, so much to cover.

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As we get started here, let's work backward and let's start with the hedge trade first, and then we’ll talk about closing trades and then the slew of opening trades that we had. The first hedge that we made today and the only hedge that we made today was in GLD. We originally had a credit call spread above the market, and as gold has continued to rally, we’re able to come back in here and sell a corresponding put spread below the market for a $.30 credit.

Now, the whole point in doing this is to one, reduce risk, and two, widen out our breakeven points. As we look here, this is a chart of GLD, and you can see since the time that we got into this trade, gold has moved 100% to our position and has now breached our short strike which was at 120. What we want to do is we want to add another side to this trade and create an iron condor which helps reduce some of the risks in the position.

If we go here too we analyze tab; this is what our original position looks like, the 121 calls and you can see that gold has moved all the way up to 121 almost exactly. It’s right at our short strike and is causing a little bit of pain because, at this point, we’re either going to make roughly $62, or we could lose about 338. We don’t want to take all of that risk right now.

We want to add another side to this trade, so what we’re going to do here we’re going to add a put spread down here at 115 and 113. That’s going to create an iron condor and blocks off the bottom side of the market. As we add that put spread, this is what the new position looks like. You can see we've reduced our risk down to 278 on the entire position, so it’s not a huge reduction, but it is a reduction, and you can see that our breakeven points were now moved out a little bit further.

Now, we did give up everything below this point. At this point, now that we’re in this trade, anything below 14, we end up losing money on as well. But right now, our risk is to the upside that GLD continues to trade higher. That’s exactly how we went about making that trade. An important thing to remember is that we did the same width of the strikes.

Notice that the width of our strikes is $2 wide, that’s the same as our original position, and the number of contracts that we traded is exactly same as our initial position at 2 spreads. And what that does is that means that you take no additional risk, you reduce risk, and there’s no extra margin required to hold this position which is superb.

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Alright, as far as closing trades today, we did go ahead and close out of our earnings strangle in C which is Citigroup. We bought that not too shortly after the market opened, but about an hour into the trading day. We bought that back for about $.20, so we made about $37 on that one lot. A nice little trade in C which is Citigroup. Citigroup didn't see that big of a drop in its implied volatility at all.

In fact, implied volatility stayed relatively the same which is amazing. We actually had working orders to get into another trade, but on the monthly contracts for Citigroup as we head into the close of the day and we didn't see that implied volatility drop. It just didn't get filled at the prices that we wanted, but if we can do it tomorrow, we’ll look to do another iron condor around Citigroup heading into February because implied volatility stayed high.

We didn't get the dramatic drop in implied volatility that we were expecting, although just with the price movement and decay in options as we get to the last day, we did see the options decline in value. It was great that we traded the weeklies. It ended up being the right trade and just made a couple of dollars on that.

The other closing trade that we had and was a partial close was in GILD. GILD was all over the map. We needed it really to pin this last week of expiration around 100 and it didn't came that close today and started trading much lower and to the point that we just felt uncomfortable holding this put spread that was in the money any longer.

We only made one adjustment to this position, but it was to go ahead and buy back the 195 put spread that was one of our hedges for a 201 debit. We bought back this put spread at a loss, but overall in the position, we’ll end up with about an $18 loss after all the adjustments, so not too bad. I don’t consider it to be a huge winner or a huge success. It was just a trade that ended up working out okay in our favor.

And you can see this is the remaining GILD position, so this is what we left on, and I think it's important to show you this because we only closed part of the position that was in the money, the rest of it we left on, and you can see it’s this massive iron condor that we have. And with GILD trading right here, I think there’s little risk tomorrow that the stock trades up to $100. But if it does, we’ll be quick to close it out.

But everything is pretty much worthless at this point with GILD, so there’s no real benefit in holding that position that we closed out of any longer. The rest of it, we can let go all the way till expiration. Alright, we talked about our hedges and our two closing trades. Now, let's get into the slew of trades that we had today, mostly short premium trades, both credit spreads and iron condors, and then we did have a couple of earnings trades that we’ll go over.

The first one that we got into is XRT. With our theme here right now just rebalancing our positions and trying to add some negative Delta to our portfolio, we decided with XRT to go with the 97/98 credit call spread. In this case, what we did is specifically sold the 97 calls, bought the 98 calls, and the difference between buying and selling them was a $23 credit.

When we go to the charts here of XRT, the first thing that you’ll hopefully notice is that implied volatility is still very, very high in XRT, so it gives us a great opportunity to sell premium. And you can see it’s been on a little bit of a rally up. Implied volatility is still very high. It's in the 69th percentile which is vital. It’s above that 50th percentile that we want.

And just looking at the charts, the thing is starting to break down. I mean, that’s all you can say about it. It's not rallying dramatically, but it's not moving sideways. It is starting to break down and even today, closing at the lows of the day as far as the close price just confirms that we’re pushing into a smaller territory.

We decided to sell that call spread above the market up here, so this puts our risk all the way up here, so XRT would have to rally back up to and through that level for us to lose money on this trade. When we go to the actual trade tab here, and you look at the position that we have, we’ve already made about $75 today, but I think the pricing is off for the spread right now, so don’t look at that. But you can see that the position that we entered right now was the 97/98.

Those 97 strikes that are currently trading have a probability of losing of about 20%, so it means this is an 80% chance of success. There’s about a 20% chance that XRT goes from 92 all the way up to and beyond 97. And if there's a 20% chance that it goes up to that level, then that means that there is about an 80% chance that it does not go up to that level and falls back down.

Alright, the two iron condor trades that we’ve made today, very, very similar in nature, both in FXE and XLE. I know we’ve got a lot of trades in Xs and Fs and Es and all that stuff, but just don’t be confused on this. These are the symbols that we’re trading, FXE, XLE and XRT, all ETFs. I’m trying to stick with mostly ETFs right now because earnings are continuing to come up and we’ll trade a bunch of earnings as we’re doing, but with these ETFs, we don’t have to worry about the earning cycle.

If we see high implied volatility in some of these ETFs, it’s a pretty decent trade. For FXE, what we decided to do is do the 119/121, so you’ll notice we did a $2 wide strike here, and an 110/108 put spread below the market, a $2 wide strike, collected a little bit more premium. And because we raised a little bit more premium with a little bit wider strike, you’ll notice with FXE; we decided only to do one iron condor.

Now, as I look at XLE which is the next trade over, we did two of these iron condors, but it was a $1 wide spread on either end, the 81/82 and the 65/64, and we collected a little less premium. We’ve adjusted our trades. Because we received a less premium, we decided to do one more contract and even things out a little bit.

This is an excellent example of how we’re scaling risk based on the different strikes that we select and the width of the strikes. We’re trying to keep everything as symmetrical as possible based on how much risk we want to take on each trade. With FXE, the 119 and 110 become our price points that we’re looking at on the chart. Those were our short strikes.

And really with FXE, this thing has just been continued to be crushed down, and we’re just trying to play some reversion to the mean at some point. And you can see this is the chart here of FXE. Just back in May and June, it was up at 137, and now it’s down at 114, so a huge drop and almost just a straight line move, but all during that time, implied volatility has stayed really, really high and some of the technical's that we look at like MACD are real, actually extended to the bottom side.

Not to say that it can’t go lower, but we’re just playing some reversion to the mean that it might rebind here or stabilize at some point in the future. And implied volatility is high, so we can have that luxury of playing those options. When we look at the actual strike prices that we’ve selected with FXE, we tried to go as wide as we could, we went down to about the 15% probability at the time that we made that trade on the bottom side and about the 15% probability on the top side.

You see those are about the strikes that we selected, a pretty good distance away from the market, trying to keep it as even as possible. You'll notice that the 110 hits are already starting to expand a little bit just in probability as the stock fell into the close today, but we’re trying to keep this as even as possible. It’s about a 70% chance of success trade the way that we had it placed, so it should be a pretty decent trade as we go into February expiration.

Alright, same thing for XLE. FXE is a Euro Trust and the iShares for Euro and then XLE is an energy ETF and we’re trying to play a little bit of a stabilization or rebound here in oil as we head towards February because at some point, oil is going to stabilize and rebound and we wanted to do something small in there.

And we had success trading XLE already this month in January, so we want to do the same thing for February and enter a new position. And you can see we mimicked what we did in FXE. I just confused myself a little bit more here too. But you can see on the bottom side, we put that strike at about the 20% probability level, and on the top side, we actually gave it just a little bit more room.

We actually tilted this just a little bit towards the bullish side just in case oil did show some rebound here soon and gave ourselves about a 10% probability on this end. It's really cool because, with options, you can mold and shape the strategies. In this case, we’re relatively neutral, but we gave ourselves a little bit more room to the top side because we decided to move our strikes out just a little bit further past where the market was trading.

We’re just trying to make ourselves neutral, but a little bit tilted towards the bullish side, give ourselves a little bit more room in case the stock does rally up to 81. When we go to the chart here of XLE, the first thing you’ll notice is that implied volatility is still very high in the 79th percentile and the stock more or less has shown some signs of stabilization even though it’s at its lows right now.

But it’s relatively stabilized around this price point, but we’re not going to discount that fact that it could go lower, but we did give ourselves a little bit more room up to 81 (learning our lesson from last month because the stock rallied up to around 81 and stopped) as we head into February just in case it does dip and then rally after that. And that’s maybe what we might be expecting, is just a small drop here before it then rallies into February and March.

Alright, those were the two iron condor trades that we have. Now, let’s go over the earnings trades that we have. We have three new earnings trades that we made. They’re all very similar in nature. With these earnings trades, what we’re trying to do is move if we can outside of the expected range or the expected move in the stock after earnings.

Let’s start here with Goldman Sachs. Because Goldman Sachs is just a high-priced security at 185/190, it’s just very high-priced stock; we didn’t want to do a strangle because it would take up too much in margin. What we did is actually did an iron condor, but we did it about five points wide. You can see on the call side, we’ve sold the 185, bought the 190 calls, and on the put side, we sold the 175s and bought the 170s, took in about $.75 in credit to do that trade.

When we look at where Goldman Sachs is (and really, you can just basically look at the actual trade tab here) you’ll notice we made the front month contracts which are those January’s, they only have a day left, and what we’re trying to do was move outside of the expected range. Well, Goldman closed today at 78.49, and the expected range of the stock is about $3.67, so about $3.70.

We tried to get outside of that range by moving down to the 75s down below the market and then moving up to about the 85s. And I think the stock was trading a little bit closer to 80 as we made this trade and trying to make it neutral, but hopefully we should see a nice little pop in this stock after earnings.

And it's been definitely known to see a real drop in implied volatility after it announces its earnings event. You can see back in October; it had a nice little drop in implied volatility. And also back in July, though not a huge drop, it did have a nice drop in implied volatility. For us, we’re giving ourselves a little bit more room to the top side here with Goldman as well, and the stock closed towards the lowest of the day, so we’ll see what happens with this, but we kept it small.

Alright, the same thing happened basically with INTC which is Intel. And Intel already announced earnings after the market, so we have that that we'll look at. But with Intel, the pricing and the premium just wasn't high enough to sell a strangle and that’s really what it comes down to. It was a low priced stock; it was a $37, $38 stock and that's okay. We usually sell strangles on those. That's fine.

But in this case with Intel, when we looked at the pricing today, it just didn’t get a lot for doing that, and you took a lot of risks. We’re trying to not take as much danger in that trade, so what we decided to do is do an iron condor trade. We could still get about $43 in credit or premium. That did mean that we had to come in just a little bit closer on our strikes.

And you’ll notice they’re fairly tight at 37 and 35, but the expected move wasn’t that big at all either, so we’re fairly confident that it could move inside of that range and that’s why we entered that trade. When we look at a chart of Intel, Intel has also had a little bit of a decline, but you can see that it doesn’t move too much after earnings except for one or two times here that it’s had pretty good pops.

Back in July, it had a huge move after earnings, but it was pricing that in. A slight move after earnings of about $1 right here and that’s what we’re expecting, is maybe about a $1 move down to about a $35 move up to about $37. That’s how we priced the trade. Let’s go into the analyze tab here and look at Intel.

You can see that after hours, the company announced earnings and the stock is already trading down to 35.30. It made just about a $1 move, a little less than $1 move down, so that’s good, it’s running inside of our expected range. You can see our iron condor is pretty balanced here as far as risk and reward.

We risk about $60 to make about $40 on this trade, so risk reward wise, it’s pretty good. As long as Intel stays right about here or anywhere in this range tomorrow at the open, we should have a pretty decent profit on our hand. Even though it was a little bit closer trade, it actually might end up turning out to be a pretty good trade.

Alright, the last one that we went into (I know you guys are bearing with me and I appreciate that) is SLV. We’ve had really success trading this last year. I like the stock, it has significant premium and has excellent liquidity. And in this case, we did decide to do the strangle. And watch. Now that I said this, it’s going to go completely haywire. But we did choose to do the strangle on this one because the premium was great.

We did the 80 calls and the 73 puts naked, and we took in $109 in credit. And when look at our trade tab of SLV, the key thing here is the expected move. The stock finished the day at 76.63. The planned move was about $3.31, so about $3.50. And you’ll notice that we definitely got outside of that range for sure because our strike prices are at 73 here and 80, that’s where our positions are, and then we subtract another dollar on top of that because of the premium that we got, so basically we’re looking at breakevens that are around 72 and 81.

That's really where our range is on SLV. And it’ll be interesting to see when it announces earnings, how much it moves, but the market is pricing in a pretty aggressive move of about $3 for the stock, and we should see a nice move in the stock, but hopefully we should get that drop in implied volatility that we’re expecting.

We’re trading the front month contracts because those are the January. They only have one day to go. They’ve got all the built-in embedded edge and implied volatility. And you can just see, the markets are very, very liquid and very wide on both sides, so there’s lots of activity here, so it ends up being a splendid risk reward trade.

Okay, hopefully, you guys enjoyed that video. I know like I said that was a little bit longer than usual, but it's important that we go over all of these trades that we’re making. If you have any comments or questions about them, please post them on this page right below here. I’m going to start trying to phase-out some of the email support because I want people to start using the website a little bit more so that the same questions don’t keep coming up over and over again in email because a lot of you guys are asking the same questions.

It's helpful for me and for other people to see that by posting comments inside the membership are. As always, if you have comments or questions, please post 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.