Earnings Trades In AAPL, KO, LMT and MCD

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Earnings trades: Today, we’re going to be going over all of the trades that we made on Monday, October 20th. Just to kick off the week here, lots of earnings trades which brings up a great topic because we do have another webinar that I’m trying to cram in before the end of this month because I usually only do one webinar a month and usually for premium members, you obviously get to go for free if you’re a premium member.

But I’m cramming in another webinar because I want to talk more in depth about earnings trades than I usually get to cover in tonight's daily and nightly video. If you have an interest in doing earnings trades or if you want to learn how to do them with a volatility crush, also looking at liquidity, timing, determining strikes, scanning for events, all of that stuff and then all of your questions, you've got to sign up and get your seat.

When I launched and sent out the emails for this, this weekend, we’ve already had a bunch of people signup. I believe that there's only right now about 18 or 17 seats left, so I haven’t actually updated the web page, but I think that there are about 17 or 18 seats left and we’ve sold out of all of these before, so I imagine that we’ll continue to sell out of these in the future and this will be gone here in the next couple of days. If you have an interest in doing that, go ahead and check it out and signup tonight at optionalpha.com/webinars.

Related "Earnings Trades" Resources:

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Alright, getting to today’s trades that we’ve made, this is fitting because we did make a lot of earnings trades today. And switching everything over, we didn't make any trades that were necessarily like long-term trades except for Lockheed Martin which is LMT which we’re going to cover first. But before I cover those earnings trades, I want to jump to the chart real quick here of the VIX. And the VIX continued to move down today; it was down about another 15%.

And I’ve said it time and time again, and when I say this, I honestly don't mean to beat my chest with this, but I get hundreds of emails from people when the VIX is up at 29 and 30 and thinking that it’s going to go to 50 and 80 and 100. And it could do that, but I always tell people that the markets are cyclical, they always are and they always will be. And when the VIX does go up, it's just a matter of time until it goes down.

And when it goes down, it goes down just as fast as it goes up. And this is important because this is literally why we do what we do, why we trade the way we do and entering premium and putting a premium on and trading the right side of volatility. If you were buying options at this point, you got crushed, and it doesn't matter if you even pick the right direction.

But anybody who is buying options around the 30 VIX when the VIX was all the way up here at 30, now with the VIX down here around 18.5, you got annihilated if you were a net buyer of options because you were purely on the wrong side of volatility. You could’ve picked the right direction, the stock could’ve gapped in your favor, the stock could’ve been up 5 or 6 points, whatever the case is, but you would've gotten crushed just because you're on the wrong side of volatility.

Hopefully, that just drives home the point that you’ve got to learn to trade smarter when you trade with options. It's not just about direction; it’s about learning volatility and pricing and time decay and all those different factors that hopefully we’re starting to teach you guys here and you guys are hearing more and more from these videos.

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Alright, as far as trades that we’ve made today, the first one is in LMT which is Lockheed Martin. This one is an earnings trade technically. Lockheed Martin does not have weekly options, so we were not able to do weeklies like we did in McDonald’s and Coke and Apple. We went out to the November monthlies which were just the closest options.

We’re still more or less trying to take advantage of this earnings trade and the volatility drop in Lockheed Martin, but if we need to hold on in the position or if it moves against us, we’re already in that November contract, so we don’t have to roll the contract if it moves against us. With Lockheed, we’ve sold the 185/190 call spread and the 160/155 put spread. We took in about $.92. We did this very, very small on Lockheed Martin.

And I’m not going to go over a lot of the charts tonight because they’re pretty much irrelevant when it comes to earnings trades. You want to look at the expected move here. And hopefully you guys can see this, but it's right up here in the top-hand corner. But the planned move for Lockheed is right around $2 right now, and you can see the stock closed at 75.5, so our earnings trade in Lockheed even though it’s out to November is well outside of that expected range. As long as Lockheed doesn't move too far beyond about $2 up or down, we should be very well-positioned.

Now, one of the other things that are kind of interesting about this trade is that it looks like… When you just glance at the chart here, it sounds like the call side which is on the left, the put side is on the right, it looks like our call side trade is a little bit closer to the money and it is just a little bit closer to the money than the put side, but you'll notice that the calls at 185 which is our short strike have about a 70% chance of hitting and the puts down here at 160 have a very similar probability, not exact, but they’re in the teens, about a 13% chance of hitting.

You can see that the market is pricing in a little bit more risk to the downside with Lockheed heading into earnings. That’s why it’s important that when you place these trades, if you’re going to put them evenly and if you don't have one directional assumption or another, that you want to focus on placing them at the same probability level on either side or about the same level, so about the 20% or 15% or 10% or 5% or whatever you want to do, but you want to focus on that same probability level and not necessarily all the time focusing on getting the same distance away from the market because there might be a higher likelihood of going down or up, whatever the case is with Lockheed.

And these will all be very much the same. McDonald's is MCD. McDonald's is the one that we decided to do a strangle on just because the premium was pretty decent, far enough out of there and it didn't take up a lot of margins to do a strangle. As always, we kept it subtle just doing one of these with McDonald's. We’ve sold the 93 calls and the 89 puts for a $.77 credit.

Now remember, this credit of $.77 helps move the breakeven out another $.77 beyond those strike prices, so we’re looking at almost $1 beyond each of those strike prices, $.75 for McDonald's. Same thing for McDonald's, it has an expected move around 160 or so. And as it starts to load up, we did the weekly options which are very close, so they’ve only got four days to go left, so they’re going to see a quick drop in implied volatility, quick time decay, these are going to start to decline very fast.

And you'll notice that we came in and got a little bit more aggressive here on the call side. We did move our call side just a little bit closer just because I think McDonald's has had a rough time these last couple of months, and maybe that leads to possibly worse earnings. We’re just skewing it slightly to the downside, we’ve got a lot of bullish positions on, and with this one, we’re just leaving a little bit of extra room to the downside in case they do miss or their guidance isn't that great. But on either side, it’s about the 29% probability of success level on the top side and the 20% chance of achievement level on the bottom side.

The next one that we entered into is an iron condor in KO which is Coca-Cola. We decided to sell the 44/45 call spread, and the 42/41 put spread, taking a $.27 credit, so a pretty good credit on the iron condor that’s only about a $1 wide. For Coca-Cola, expected move heading into earnings is up or down about $1.23 or so. That’s a pretty decent move for a big stock like this.

We decided to go to about the 25% probability of success level and things changed between now or between the time that we entered the trade at the end of the day. And on the topside now, we’re looking at about a 30% chance of success. It was around 26%, 27%, both of these were around 25% or so earlier in the day, so that's what we were targeting, is about the 25% chance of success level on either end.

But you can see with the stock closing at 430 and then the credit that we took in, we’re just outside of that expected move range on Coca-Cola on both ends, so we like this trade. I think it’s a pretty good trade. We’re cutting it close on this one, but with an iron condor, we can do that because we were able to sell it and protect both sides.

What’s fascinating about Coca-Cola and one thing I wanted to highlight here… And this is stuff that we’ll talk about on the webinar. But the reason that we decided to go with even strikes, the 42/41 is because if we get into a situation where we have Coca-Cola moving against us tomorrow, and we have to roll the position out to next month which is usually our first line of defenses, close the side that’s winning, roll it out and enter a new side close to the market, come closer to the market, adjust in.

If we decided to roll out to next month and keep the same strike prices, you'd notice that only the even strikes are the strikes that are trading for the next contract month, so 42/41. These are the strikes that have a lot more liquidity. Just in the back of your mind, this is something you might want to do in the future, but take a look at that next month if you're trading the weekly contracts because sometimes looking ahead at that next month might help you decide which strike prices to choose.

And if you have to come in a little bit closer or move out a little bit further, just having that backup plan to know that you can roll to a liquid contract in the next month might help you adjust the strike prices that you’re looking at. Same thing on the call side, you look out to the 44 and 45 strikes, and they have way more open interest than the in between strikes are going to have after tomorrow.

And you can see that these are very liquid, so if we do get into a sticky situation with Coca-Cola and us have to roll that contract, we know that we’re going to be able to roll them to very liquid contracts, we’re going to be able to get out of these weeklies and into the monthlies as efficient as possible.

Alright, and then the last one that we got into is our iron condor in Apple. We did this one a little bit bigger. Apple is a little bit bigger stock. It’s only a $1 wide iron condor on either end. We sold the 104/105 calls and the 95/94 puts. We took in a very nice credit of about $.35. Apple premium is very, very rich. It should be a kind of interesting trade for sure if we can hopefully get Apple to move inside of a nice expected range heading into earnings.

But it's already seen a drop in implied volatility, so premium has already come down anticipating this earnings event, but I think that we’re going to see an even bigger drop in implied volatility as we get closer to earnings. When we look at the actual chart here of Apple or the trading grid, you can see we did get a little bit wider on Apple and a little bit movement in the day, but we did try to focus on about the 20% probability of success level for Apple up here on either end.

We went out to the 95 strikes down below about the 20% likelihood of achievement level and above up to 104 about the 20% probability of success level. Apple obviously is extremely liquid, so there's no need for concern about rolling or anything like that with Apple. It’s very, very liquid and I think it’ll be a pretty good earnings event for Apple. I don’t know if they’ll rally.

I think if their guidance is excellent, I believe that they’ll rally, but generally, I think their earnings are going to be relatively stable. And the market is looking for almost about a $4 move on either end, so you’ll notice that we tried to get just outside of that range and took in a pretty decent credit to do that. We’ll see what happens tomorrow, but those are all of our earnings trades.

You know it’s pretty heavily late in the schedule hereof gains and then nothing else that we adjusted or closed out. As always, if you guys have any comments or questions, just go ahead and add them right below this video, 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.