Examples of Earnings Option Trades In COH, MGM and CVS

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Earnings trades: In tonight's video update, we're going to cover both the closing trades on Friday that we had as far as earnings and new opening trades that we had today Monday, August 3rd. I figured I'd just cover all of these at the same time, it was a real busy weekend, lots of stuff with family and our daughter, so I didn't have time to get out the Friday video update, but it was all closing trades.

There was, nothing new to report, no hedges or anything, so I figured I could do this-this Monday and get those taken care of as well. Friday was a really good day for us as far as earnings. Had three of our three trades that we had traded from Thursday afternoon into Friday morning all close with nice big profits. 

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LinkedIn was the first one. We bought back our iron condor for basically a 16 cent debit, almost max profit. Took in $124 on LinkedIn, and then we did DECK which was D-E-C-K, bought back our strangle for about 11 cents. Again, almost near max profit and took in $104.

Our final trade was EXPE, bought back our strangle, a little more expensive than I wanted to buy it back for, but it ended up being the smart decision to get out of it early in the morning because later on in the afternoon, EXPE ran much, much higher and it would have turned into a losing trade had you closed it out later in the day.

We were able to still take a $70 profit, I was hoping to take a little bit more than that out of EXPE, but it ended up being the big runner. This is LinkedIn, again, the stock opened up and gapped lower but it wasn't big enough for the expected move, and you can see implied volatility dropped like a rock during that period.

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Same thing pretty much with DECK, which is D-E-C-K. The stock had a little bit of a move up in implied volatility as you can see it Cropped. Then EXPE, it was the big mover, it opened big, but it continued to rise higher, so that was the big note on EXPE.

It opened inside of the expected range around $15.50 or so, remember our break-even point was around $19 to $20, and you can see all day long the stock rallied higher, and higher, and higher, so getting out in the open, which was right about here ended up being the really smart decision.

Again, that's part of the reason why we try to get out of some of these trades at the open. We're just trying to take advantage of the drop in implied volatility which we did in EXPE. Moving on to other trades that we have for today. The first one is in Coach, so we did a nice little aggressive straddle in Coach, right over where the stock is trading.

We sold the August weekly; they're the AUG1, as a reminder, the one tag at the end of AUG just means it's the first weekly Friday in August. The first Friday in August, that's the weekly contracts, you can always remember that these earnings trades if we ever do a weekly contract it's going to be the front-most weekly contract. I think these have four days to go til expiry.

With Coach, we did things a little bit more aggressive. We did the 30 CALL and the 30 PUT right over the market, took in a nice big credit of $270 which is more than the expected move. Stock closed today a little bit higher than that, around 3043, but you can see that the implied volatility percentile's up in the 99th percentile, so it's got insanely high implied volatility, and for a $30 stock we can't help but not be as aggressive as humanly possible, selling everything that we can right at the money.

We did the 30 strikes, which is right here, again, right on the money on both sides, so sold the PUT, on the PUT side. The CALL on the CALL side. Our credit of $270 is more than the expected move so we should be good hopefully tomorrow when Coach announces earnings.

We'll assume that they'll go inside the expected move because we've got probably a little over a 68% chance of success with this trade, about 70% chance of success. Our next trade that we did is in MGM. We went ahead and did the straddle on MGM as well, the 20 CALLS and the 20 PUTS for a nice big credit of $1.27, again, that gets us outside the expected move.

Basically the same thing here with MGM, because the stock has really high implied volatility in the 81st percentile, and although it's had a recent move up, you would assume that that's going to give it a little bit of a drop in implied volatility, but because of the recent move up, it still maintains that high implied volatility.

Heading into earnings tomorrow, have to super aggressive with these types of trades because implied volatility's in our favor, so we want to take advantage of that. Again, the same thing, we did the weekly contracts right at the money where the stock closed and where we traded it's $19.50, expected move is about $1. We took in about $1.27 so we should be pretty good tomorrow, and we'll see where MGM opens up on the day.

Last trade that we made today is in CVS. We did the strangle this time in CVS because implied volatility was high, but it wasn't quite as high as it is for MGM and Coach. We still wanted to be aggressive in selling naked options, but we didn't want to do it insanely aggressive like doing the straddle right over the market, that's kind of the purest, most ultimate volatility play that you can have.

Again, we did CVS, we did the 116 CALLS and the 108 PUTS, took in a nice little credit of $83 on that trade. The whole idea here with CVS is that we just want it to move outside the expected range. You can see implied volatility is high, it's in the 58th percentile, 59th percentile, that's fairly high, stock's not really much of a big mover around earnings, so the expected move is very, very small, and then what we tried to do is just get outside of that expected move.

For CVS it was about $3 is what the market is anticipating, so with the stock closing around $1.13 or so, given some change, we could expect the stock to move down to around $1.10 or up to around $1.16. Again, our strikes are just a little bit below that on the PUT side because we've got the 108, and we put it right at the 116s on the call side.

But remember that our credit of 83 cents moves us out a little bit higher so we've got a break even point a little bit closer to about $1.17 so we definitely are outside the expected move, probably have a little more than a 70% chance of success on this trade. I like this trade. Hopefully, it ends up turning out to be a nice good trade. We'll see what happens today after the market when CVS announces earnings.

Until next time, I hope you guys enjoy these videos, if you have any questions at all, please let me know. Add them in the comment box right below, and we'll talk to you soon. 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.