What Happens On Earnings Trades When Volatility Doesn’t Drop?

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Earnings trades: In tonight's video, we're going to go over all the trades that we made on Tuesday, August 4th. So it's all earnings days, earning trades for us today. We had three closing orders from yesterday in Coach, CVS, and MGM. And then three new opening trades in Priceline, Zillow, and First Solar.

So to go over the closing trades, I mean it was pretty much a scratch day. I mean it's honestly, I was looking forward to having a little bit more money out of these earnings trades, but it didn't work out. Implied volatility for some didn't drop, the stocks kind of tested the upper boundaries of a couple. So, all in all, it ended up being a scratch day.

Coach closed out for the same debit that we opened it, so that was no gain, no loss. CVS small loss, as the stock opened and fell quickly after the open. It did rebound during the afternoon and would have ended up being a nice trade, but again you don't ever know if it's going to turn around or not. And then MGM turned into a nice little profit, but, you know, covered the loss in CVS with a couple of dollars extra.

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So I think, you know, the one that surprised me was CVS; very volatile, hadn't been as volatile in the past couple of earning cycles. So a little bit more volatile this time, even though implied volatility wasn't so high. And we didn't get that drop in implied volatility that we were looking for, I mean it only went down from the kind of you know, 57-58, down to 42 or so.

So I think that's part of the reason why the options didn't drop as quickly in value. For the other ones like Coach, we saw the implied volatility drop quickly. MGM, same thing, saw a pretty good drop in implied volatility.

MGM, ironically enough, moved way outside the expected range once the stock had opened. So closing it out during the beginning of the day turned out to be the right call. So, in that case, we actually kind of, you know, saved a little bit of money on that end.

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As far as new trades go, I like all of the new trades we got into. I think two of them announced earnings after the market. So Priceline's the first we got into, really, really wide iron condor on Priceline. Implied volatility is very high on Priceline right now, and but ... With the stock price at you know, 1200 dollar stock price, it's hard to sell naked options on that and cover the margins.

So we did a 5 dollar wide iron condor, basically 5 dollars wide on each side. We sold 1380, 1385 credit call spread and then 1175, 1170 credit put spread for a total credit of $1.58. Now, this is well beyond the expected move, but here's a chart of Priceline so you guys can see kind of where the stock is.

The stock ended up a little bit higher on the day, rallied into the close. But implied volatility very high, in the 80th percentile, so nice implied volatility for Priceline. When you look at the actual underlying options, you can see that the expected move on the stock was about 76 dollars. So a pretty big move for security like this.

Now our goal was to move obviously beyond that, so with our strikes and the stock closing at 1283, our bottom strikes are well, well beyond that. So if Priceline kind of, you know, poops the bed and dumps on earnings, you know, we're going to be well below the market. Our first strike is at 1175, so more than 100 points away.

On the top side, we're just about 100 points away, selling the 1380s. So again about 30 dollars outside the expected move. Trying to get, or about 25 dollars outside the expected move, just trying to get a little bit of distance between ourselves and the market to make sure there is enough room for Priceline to move.

And again when you look at the analyze tab for where Priceline is, I mean, we've got a huge, huge and wide range. But this is a big, big stock and it's a big price stock, so it's going to be a mover for sure. So I assume it's going to be, you know, towards one end or another when they announce earnings tomorrow.

Zillow is one that announced after the market closed. We did a nice wide strangle in Zillow; we did the 85 calls that are short and the 65 puts. Took in a nice big credit, even going further out then the expected move of about $1.70. Zillow right now did announce earnings after the market closed and it is trading up a little bit.

So implied volatility is in the 81st percentile, stock under 100 so we feel comfortable doing the strangle and doing it naked. Stock right now is up around 85, so just past our, or just right at our short strike on the top side after the market with the stock moving after earnings.

But our break-even point is about 86 1/2 or so, so we've got a little bit distance between ourselves and the market. We'll see what happens tomorrow when the stock opens up, but doing the strangle and doing it as wide as we did, might turn out to be a pretty decent trade.

But again we'll see where the market opens. First Solar is another one that announced earnings after the market closed. We did an iron condor on First Solar. Not because we couldn't do it with the lower price stock, but because implied volatility wasn't as high as it is in Zillow and some of the other ones.

So we always opt for doing the iron condor, it's just a little bit more protected in case things get, you know, that the stock surprises one way or another and it's not built into the pricing. So we like to do the iron condor when implied volatility maybe as just over that 50th percentile, maybe the 50th to 60th percentile or so.

That's where we like to pull out the iron condor and kind of trade it just a little bit more risk defined. So in this case with First Solar, we did the 47, 49 call spread and the 40, 38 put spread for about 70 cents. So actually took in a pretty decent premium and again here's for Solar.

You can see implied volatility for the stock, just above the 50th percentile, about 51 percent. So it's not incredibly high, it's not incredibly low, it's just meeting our parameters. So we want to do it, you know, a little bit risk defined and as wide as we can.

First Solar, FSLR, First Solar did announce earnings after the market closed today and is trading right at our strike price on the top side. So again this one's going to be a little bit weird to see what happens tomorrow, but hopefully First Solar, you know, trades a little bit lower or even stays right here.

But it's trading basically at our break-even price, kind of after hours right now. So it made a move that was kind just about the expected move, and we'll see what happens when it opens tomorrow, and obviously we'll keep you guys updated along the way with any new updates or trades that we're going to do, or adjustments tomorrow morning when that happens.

As always, if you guys have any questions at all, please let me know. Add them to the comment box right below this video on the trading page. 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.