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Earnings trading: In tonight’s video update, we’re going to go over all the trades that we made on Wednesday, July 22nd. It was pretty much an earnings day; we had a couple of trades that rolled off that were automatic closing orders, so we’ll go over those here in a second.

First, I want to go over the earnings trade that we had in SNDK which is SanDisk. Now, we’ve traded this one before in the past, and it gave us trouble I think the last time we traded it, not last quarter, but the quarter before. It looks like it’s going to provide us with a little bit of trouble, this time, around, but an opportunity for us to learn how to make adjustments and manage these trades.

We did go ahead and do the straddle that was right on the market. That was a typo on my part here. It was a straddle right over the market, not a strangle where we sold the 54 call and the 54 put right on the market, and that gave a big credit of $4.19. Now, what that did was that allowed us to go outside of the expected move.

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Here is a chart of SanDisk. And you can see implied volatility is in the 85th percentile, so insanely high implied volatility. Again, we chose to do the straddle because implied volatility is up in this upper echelon here of pricing, and that gave us the biggest edge possible long-term.

In this case, it might not work out because the stock moved more than expected, but long-term, this is the type of strategy that we want to go after. You could’ve still done the strangle if you wanted to and moved outside a little bit further. I know some people have emailed me and said, “Hey, I did the strangle at 50 and 58.”

That’s fine too as long as you’re net selling options. But in this case, if you have the ability to go ahead and do the straddle right over the market, that is the best trade long-term. Even if this one doesn’t end up working out after all adjustments, that’s still the proper technique into going into these earnings trades.

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Now, another thing that some people have asked about is converting these two iron condors. And I won’t give them in the trading alerts because there’s honestly a million ways that you can do it based on your account size. If I do it one time, we’ll have to do it for everybody based on their account size.

But again, the whole idea of converting it to an iron butterfly or an iron condor is that you’re going to sell the options right at 54 which is precisely where we did, and then you would go out some certain distance on either end, some equal length on either end and buy protection to create that iron butterfly.

If you wanted to go out $4, you could go out to the 58 calls on the top side and the 50 puts on the bottom side. If you want to go out another $6 or $4, you could go out down to the 48 on the bottom side and then you could go up to the 61s on the top side. But as long as you’re doing an equal distance between all of the different strike prices, that’s ideally what you want to do to create that iron butterfly.

And again, it’s going to depend on your account size, it’s going to depend on your risk tolerance, so check out our guide on position sizing because that’ll help you determine which one you can do for the earnings trade.

Now, we went ahead and did the 54 straddle right over the market. And basically, what that did is gave us a credit that was equal to or a little bit beyond the expected move of the stock. Long-term, the market was expecting this thing to move around $4. It ended up running more than that right now before the markets opened.

Right now, stocks trading at about 61 or so in change, so it moved about $4 beyond the expected move at 58 on the top end. We have a little bit of a challenge on our hands tomorrow. We’ll see where it opens up. SanDisk has been one of those stocks that move all over the place pre-market earnings.

It was down earlier and then it was up. Same thing, Chipotle was up and then it was down. It’s all over the place with these earnings trades. We’ll see what opens tomorrow. But the technique that we’re going to use tomorrow immediately after the market opens is first, to roll up our put side.

One of the things that we could do if we want to stick with the July contracts – And we’ll determine this tomorrow based on pricing. Is that we can roll up the put side and roll that closer. This will make us go inverted, but we talked about this on the strategy, on the live Q&A call last night.

The fact that we’ve got enough premium here that we can give up a little bit by going inverted here actually works to our advantage that we took in such a significant premium, to begin with.  In this case, what we do is we move our short strike on the put side only because that's the side that the market is moving away from.

Now that the stock has moved up to 61, we’re going to go ahead and move our put strike from 54 up to somewhere around 60. In this case, I just put in a sample trade here. If we moved it to 60 1/2, we bought back the 54; it’s going to be a vertical credit spread order. That’s how you can get this roll in or this adjustment higher in your put spread.

And if we possibly took in about $1 credit, then this is what the overall resulting position would look like. You can see that if we took in that $1 of credit, then it sounds like basically a strangle payoff diagram, but it’s an inverted strangle and that’s basically what we have. But now, our breakeven point is much, much closer to where the stock is currently trading on.

That would be the ideal situation, is to be able to roll that thing higher tomorrow once the market opens and see what we can do from there. We might end up rolling it out to the next month. But of course, we'll always keep you guys updated, but the first thing that we’ll try to do it roll up that put spread.

A couple of earnings trade that we got out of today. Everything that we closed out of today had some nice profits. I think it was an excellent day to bank some profits. We bought back our straddle in Microsoft, bought that back for a $139 debit, just basically closing out of each side. That was a $94 profit in Microsoft.

Same thing in GoPro – Went ahead and bought back our iron condor in GoPro around earnings right after the market opened, about $8 in debit, took in a $90 profit on GoPro. For these two trades, they just moved inside of the expected range; implied volatility dropped which helped out in both cases.

That helped out for both Microsoft. You can see stock did make a big jump down, but it was inside the expected range. Implied volatility dropped on Microsoft. That helped out. Same thing with GoPro – GoPro was PRO. GoPro saw a huge drop in implied volatility, and you can see that drop in implied volatility, and the stock opened unchanged on the day, so not a big move in GoPro.

With Chipotle – Chipotle was a fascinating one. The stock was down pre-market last night and then opened up higher today around 680 or 698, somewhere in there, and then closed all the way around 725, so just a huge, huge move in this burrito stock, it’s insane. But implied volatility dropped and that still allowed us to take a profit on the trade.

We only closed out of the call side in Chipotle. There’s no sense in this case in closing out of the put side because it's so far away, it would’ve cost us more in commissions to buy that back, so we just closed out of our 740/745 call spread for a $1 debit, took a small little $50 profit. I was hoping to take more in Chipotle, but it had a huge move today, and that obviously ate into a little bit of that.

The last two orders are our closing orders. These are just generic closing good-till-cancelled orders that we’ve had working pretty much all month. These are orders that as soon as we place a new iron butterfly or iron condor trade, we’ll automatically go in and set our targets based on our when to exit guide which is right on the platform.

You just want to go to the dashboard and then head on over to the PDF section, and you can see all of our price targets for different types of strategies. For iron butterflies or iron condors, you know exactly what sort of profit target we’re looking for. And then all we do is we place those working orders.

And when they get hit, they automatically get hit, we don’t have to think about them, and the market gets us out at the prices that we want. In this case, we got out of our EFA iron condor, and we also got out of our EEM iron condor both for nice little profits just trying to stay as systematic and robotic as we possibly can with our trading before we head deeper into earnings season.

Hopefully, that helps out today. Tomorrow should be another jam-packed day of earnings. I think tomorrow is probably one of the busiest days for earnings that are going to be coming up in the next couple of weeks, so be prepared for hopefully lots of orders that we’re going to get into the market at the end of the day. And 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.