Earnings Trades in NFLX, IBM, UNP & SNDK

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Earnings trade: Today, we’re going to go over all of the trades that we made for Wednesday, January 21st. We had a pretty balanced day, but before we get into that, just as a quick reminder for those of you who haven't had a chance to listen to show number 16 of our podcast, our first Interview with another trader and a guy who was a here at Option Alpha before and has now gone on to be a trader that has a full-time job, but is creating a great trading system that fits his lifestyle, an interview with Henrick, I’ve gotten so much feedback from both in email and comments and what I ask is that you guys go out, check out the interview.

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Related "Earnings Trade" Resources:

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Alright, as far as trades go, like I said, we had a pretty balanced day, a couple of opening trades, closing trades and some hedges. I’ll start off today by going through the hedges in Netflix. Netflix, obviously as we talked about last night in the video had a huge move higher, had almost a two times expected move higher today. There’s nothing we can do about that, but we can hedge the position. And what we did specifically is two things.

We talked about it last night, but I’ll go over it again here. The first thing that we did in our first trade was to roll the call side to the next contract month at the same strike prices. Specifically, what that looks like is it's one single order in Thinkorswim, it's a vertical roll of Netflix to February from the Jan 4 which is the Jan 4 weeklies, and we kept the same strike prices, the 390/395 calls.

Now when you make this trade, you’re selling a vertical roll. It is a vertical roll. It’s a sell for a negative credit. I wasn't going crazy when I sent out this alert. It is a sell, a sold for a negative credit, but this is a debit because a negative credit is a debit instead of a regular credit which is money in your account. We paid a $65 debit for this roll.

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And I’ll go to the charts here in a second. Now in addition to doing that, we moved up and added another put spread below the market in February. The February put spread that Netflix moved away from, we didn’t touch it all. That one is going to expire worthless and profitable because Netflix moved higher. What we did has we added a put spread in February to compliment this position. And you'll notice we moved it as about as close to that current position as we could without going inverted.

We sold the 390 puts, and we bought the 385 puts, and we took in a credit of 145. When you do this like we always talk about, the important thing is between both of these different transactions, is that we did take a credit of about $80. That helps reduce our risk on this trade by $80 just with this first adjustment. Now, we can continue to roll up the put side as Netflix moves higher if we want to.

And we’ll make that decision as we go through the trading month here. But right now, we’re able to at least reduce our risk by $80 without anything else happening. This is so much better than doing nothing in which case, we would've had a bigger loss about $80 higher.

Now, people always ask me why I don’t roll up the call side. Well, it’s never actually been proven. There are no studies that have proved it. I've never been taught that way to roll the side that the market is testing because, at this point, this side is already losing money. Why create even more losses by rolling it higher just to see the market continue to run higher, or Netflix continue to move higher?

Even though this side is already losing money, we’re still going to stick with this side because in some cases, the stock might come back down to around 390, 395, we might have an opportunity to close out this side. We’re not going to dig ourselves deeper into a hole by rolling this side up and out further in the expiration month. When we go to the charts here, and we take a look at Netflix, you can see the stock had a huge, huge move higher.

And as a result, implied volatility did what we thought it was going to do, had a huge drop in implied volatility, so that's why it’s so important to make these adjustments so close to open up the bell as possible because you get as much volatility out of the back month contracts as you can. But Netflix had a huge, huge move higher…

And just as a sidebar, who would’ve thought that Netflix would have gapped lower by almost $100 and then have moved up by nearly $60, $70 here in just the span of three months. It’s just huge, huge moves in the stock market and nobody sees these coming, nobody saw this jump low, nobody saw this big move back up high. It's just unrealistic to think that somebody knew that both of those moves were going to happen. This just proves the point of the market randomness that we have to subscribe to if we want to be successful.

Now inside the trade tab, this is exactly what we did, so that you guys can see these positions. As I had mentioned before, we still have the 290/285 put spread for January. These are the weeklies. We’re not going to touch those because they’re far, far out of the money. And you can see our position right here is all the way out of the money. Netflix isn't going anywhere close to that position. It’s got to go down by about $110 in the next two days.

Not going to happen or a very little likelihood of happening if it does move that way. And what we did decide to do is we did choose to keep the same strike prices on the call side. We have the 390/395 on the call side, and you can see we have the 390/385 on the put side. And basically, what we’re doing is creating a butterfly right over 390. Now, here's the deal.

This is just giving us an opportunity that if Netflix comes down in the next couple of days, we have a chance to close out this position at some reduced loss or possibly even a profit depending on where implied volatility is. And as we look at the risk profile, that’s all we’re trying to do here. First, reduce risk. Second, leave an opportunity on the table for us to possibly make money if Netflix moves lower. I’ll just take off these two, and this is what our butterfly spread looks like.

It’s a little hard to read because it’s an orange, but you can see it’s all focused over 390 and at this point, we don't lose or gain any money being in this position, we just extend our trading timeline, we got back another $80, and we’d ideally like to see Netflix make a move down to around 390. And that's not out of the question. That’s about a $20 move.

The stock has made a huge move today, so all we would need is the stock to move down to the right about this range right here. A magnificent chance that at some point during the month, it might dip down there and then rally from there, so I wouldn’t say it’s out of the question, but we have an opportunity to extend the trade, and that’s what we wanted to do.

Alright, as far as other trades that we closed out, we did have a profitable trade in IBM. IBM was a pretty nice winner. IBM moved inside of its expected range. We had the 165/170 call spread and the 145/140 put spread. We wanted the stock to trade anywhere between 165 and 145.

When we look at the chart of IBM, it ended up trading right inside that range and closing at about 152. We both got the drop in implied volatility that we were expecting and the stock just had a very minimal move at the open, so the best thing to do is just close out that position and bank the profit and move on.

Alright, two new earnings trades that we did enter. It’s just all about earnings here, entering trades and exiting trades and adjusting trades. We did enter two new earnings trades, one in SNDK. Now, we were smart about this one because this stock has had the propensity to make very, very significant moves after earnings, no different than Netflix. We wanted to do this with an iron condor. We did the January 85/87 calls and the 75/73 puts, took in a $.60 credit.

That means that we need the stock to move basically between 85 and 75 after hours. Now, when we look at the chart here, you can see that historically, it’s had an excellent chance of seeing that drop in implied volatility after earnings, so it’s great, and implied volatility is already high, so that’s also good. The stock has already made a pretty huge move, so I'm hoping that the stock doesn't make a huge move after earnings.

That’s what we’re thinking here, is that the stocks already made a beautiful move heading into earnings. It might not be that big of a surprise if it doesn't make a big move. What we decided to do in SNDK was just go out a little bit further than the expected move which was about $4 and try to trade it that way. Now, what you'll see is that the stock (as the stat is loading up) is trading after hours right at our short strike at 75.

This gives us a little bit of room because remember; we took in a $.60 credit so that $.60 credit moves us beyond the 75 strikes. It puts our breakeven at about 74.45. We'll have to see where this thing opens up tomorrow and see where it goes. But what we did is decided to do an iron condor here with SNDK. And you can see on the profit and loss diagram here that the stock is trading just marginally at the expected move.

It didn’t make a little bit more of a move than the market was predicting as far as expected move, but this will be one that’s going to be close to the open of the bell and see where it lands. This will be one that we try to close out early if we have a small profit or a small loss. We don't want to let this thing go all the way into being a loser. But we took in an excellent good credit of about $60, risking about 140. It's a pretty fair trade in our opinion.

Alright, the other weekly earnings trade we did was in UNP. We decided to do the same thing in UNP, the 119/120 calls, and the 110/109 puts, took in a credit of about $24. A little bit more conservative trade because we did decide to narrow the strike width. You can see here with SanDisk, we were $2 apart, with UNP, we were just $1 apart on either end, so a smaller credit for $1 apart trade, but ideally what we wanted to see happen was the stock make a move inside of that range.

This one didn't have that great of implied volatility as far as height, but we tend to see a pretty good drop in implied volatility afterward. And it’s not a stock that moves too much after earnings. You can see a bunch of the earnings times before, in the past, the stock has maybe moved a couple of dollars, but it's a stock that doesn't move too much after earnings, so hopefully it won’t move all too much on us as well.

Currently, after hours, it’s still sitting at about the price that it was at, so we'll see what happens. But this is what our profit and loss diagram looks like. Make everything from 110 to 119. That’s the range that we’re looking at, and the stock is sitting nicely right in the middle of that range. We’ll see what happens tomorrow when earnings are announced, and the market comes out, but it should be a pretty good trade as well.

Alright! I think that pretty much wraps it up for tonight. If you have any questions about these earnings trades or any of the trades that we’re making, please add them right below in the comment section. I’ll make sure I 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.