DECK Earnings Strangle Option Strategy

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Strangle: In tonight's video, we’re going to go over all the trades that we made for Wednesday, May 27th. Tonight, we’re going to show you a great example of not making a smart trade because I didn't double check and I went way too quickly through the trade towards the end of the day. And the first trade that we’re going to go over is our earnings trade in Deck, DECK.

And this is my mistake, this is my bad, and it’s just me going a little bit too fast towards the end of the day and trying to get a trade in, but I didn’t realize that they announce tomorrow after the market opens, not today. That was not an intended strategy. There's no weird approach that we have going. I know a bunch of people emailed me and said, “What’s the strategy a day before?” No plan a day before.

It’s just a trade that we made that we didn’t want to go today. But we’re still going to go ahead and talk about it. We’re still going to just hold it through tomorrow. We’re not going to make any adjustment or anything like that. We’re just going to hold it through tomorrow and earnings. It should remain a fairly balanced and even trade tomorrow. It doesn't think like Deck moves all too much during the day.

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We went ahead and did sell the 79 calls and the 65 puts. We took a massive credit of 182 to do the strangle. And we wanted to do it a little bit more aggressive than we usually do because implied volatility is up around the 70th percentile. You can see IV is high for Deck and it tends to have a very quick and dramatic drop in earnings. And with our credit that we took in, we are well outside of the expected move for this stock.

Here we are on the weeklies and you can see our put position is all the way down here at 65. The stock closed today around 71.5. And with an expected move of about $6.5, that puts us well outside of the expected move even with our short strike. And then we add another $1.85 on top of that to get our $1.82 on top of that to get our real breakeven point or subtract it from there.

We’ve gotten a stock that’s got wide breakeven points on the top side, and it seems like most people maybe are leaning a little bit heavy towards the top side. We went all the way out to the 79 strike, so that puts us well outside of the expected move and then some and taking in a pretty good credit. This hopefully should end up being a good trade. We’ll see where the stock moves tomorrow. If it moves up just a little bit, it might rebalance just very, very slightly. But all in all, it should end up being a pretty nice looking trade.

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The other trade that we want to go over today is our adjustment in Coach, very similar to change to what we did yesterday, so go back and review yesterday's video tutorial which is right down here if you’re inside of the membership area. And in this adjustment, we went ahead and rolled down our 37 calls to 35.

Now, the reason that we did this is that Coach gapped open lower today and subsequently rallied throughout the rest of the day. But it did gap open lower, and that gave us an opportunity to buy back our 37 calls for about a nickel. They have run the course for us and gave us all the premium they could get us through expiration. We went ahead and rolled down at the 35s; we took in a little bit more credit of about $.35.

We’ve still got a pretty massive credit working here in Coach. Now, here’s the look at the stock chart and you can see that the stock gapped open well below 35, so we rolled very close to where the stock was at the time of the open. You know we moved from 37 down the 35. The stock opened up around 34.5/34.75, and we’re just trying to get just outside of that range to give us a little bit more credit.

Now subsequently, the stock has rallied back higher and is now at 35/36. That’s where it closed today. And what we want to see is the stock just end between our strikes on this inverted strangle. Ideally, we’d want the stock to close between 35 and 43. And at this point, that’s exactly where it looks like it could be heading. We’re doing okay with this right now.

It hasn't gone our way since the beginning, but we can continue to adjust and hedge and protect this trade by rolling down our call side which is exactly what we’ve continued to do. Hopefully, the stock just continues to either stay here or maybe rally just a little bit more, but anything between 35 and 43 is precisely where we want the stock to sit as we head towards expiration. Alright! That’s it for today, only two trades.

Hopefully, we should see some good movement in the market tomorrow and get some more trades on. Until next time! If you guys have any other questions, please add them right below in the comment section here on the membership area. I’ll get back to all of those tonight or tomorrow before the open. 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.