GPRO Option Trade Adjustments – From Full Loser to $2 Winner

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Option trade adjustments: In tonight’s video, we’re going to go over all the trades that we made on Wednesday, May 13th. It’s a pretty active day, not only just with closing out trades but one just quick earnings trade that we did have in Cisco which hopefully should go well.

But we were pretty active today as far as closing out trades. As we get closer and closer to expiration on Friday, we apparently are trying to manage some of the trades that we have left over from both earnings during the last couple of weeks and just regular monthly trades.

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The first one I want to go over tonight though is our new opening trade in Cisco. It's probably one of the last earnings trades that we might make. Hopefully, we might make another one at least in HPQ later on this week or next. With Cisco, we saw high implied volatility, lots of good volumes.

It's pretty much a case study on a good earnings trade because the volume is so good, implied volatility is so good. And what we wanted to do though is take advantage of that, and the best way we could is to sell a straddle right over the market. In this case with Cisco, we sold the 29 ½ call and put on both sides and took in $1.30 in credit.

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Here's what Cisco looks like on a chart, just so you guys can see this. It’s been in a little bit of an uptrend, maybe possibly a pop higher in the stock after earnings. We played it a little bit bullish. We had to play it a little bit directional because there's no strikes at 29.35. We played it just a couple of cents higher, a little bit directional, but you can see it’s got a good history of seeing that drop in implied volatility after the earnings event.

And right now, IV or implied volatility rank is up in the 70th percentile or very close to the 70th percentile. A very, very high implied volatility. That’s why we went just a little bit more aggressive with our trade and did the straddle right over the market.

You can see we’re just doing the straddle right over the market. We sell options on both sides of the market right at the same strike price, the 29 ½. And that credit of $1.30 got us outside of the expected move which was about $1.20. That’s always important that we take in enough credit to get outside of the expected move.

Now, Cisco has announced earnings after the markets closed and it’s only trading down about $.10 or so. It’s trading at par now. Hopefully, this should end up being a pretty good trade. And you can see we’re right in the market here, so we’ve got a little bit of room between ourselves and where the stock should trade. But they’ve already announced earnings, so it should be interesting to see where we end up tomorrow.

As far as trades that we closed out of, GoPro is the first one I want to go over. This is the classic, perfect example. And we’ll do a big case study on this and throw it into the membership area here in the next week. But this is a classic example of extending the trading timeline, taking a trade that went completely against us in the beginning and turning it into a profitable trade.

Although it's only a $2 profit, but at least at this point, we turned a trade completely around; we took a trade that went 100% against us and turned it all the way around. And this is something that we’re going to be going over in our webinar coming up next week. If you haven't signed up for the webinar just yet, you just want to go to the webinar page here; you just want to go to optionalpha.com/webinars.

Again, it’s coming up next week in about seven days. And we’re going to be going over all of these adjusting techniques that we have, how to adjust, how to setup alerts to notify you when the best time to make an adjustment is, so that you can make it very systematic, very easy, and then lots of case studies and examples where we were able to turn around trades and either turn profits or cut our loss down dramatically.

In the case of GoPro, we went ahead and bought back our straddle which was the 52 ½ call and put for $6.45, made a $2 profit overall. When we look at what happened in GoPro and just to recap this a little bit here… But you can see the second that the stock announced earnings, it jumped higher than our original trade was, it jumped outside of our expected range. And this is really where we got hurt.

It’s just this one day right here where the stock moved. But since we extended our trading timeline, we gave ourselves another week and a half or two weeks here to see possibly if GoPro could move down. We saw the stock settle into a range here and ended up exactly where we thought it was going to be right before earnings.

Giving ourselves that extra time to see the stock settle back down into this range allowed us then to turn this trade all the way around by making a quick, very systematic adjustment to our strategy, and we were able to take in a nice little profit on this trade. Again, we’ll have a huge case study on GoPro loaded up into the membership area here in the next week.

The other trades that we got out of today: We got out of our trades just the call side that was on the money and our naked put in FXE. Everything else that we have in FXE, we’ve got a pretty big convoluted iron condor that remains in FXE. Everything else that we have remained in FXE, we’re going to let expire worthless.

And I didn't go ahead and total this up here, so let me pause the video, I’ll be right back. Okay, just totaled up everything. For FXE with the May position that we currently had, we made about $90 after all adjustments; we did a couple of rolls up to take in some extra credit and reduce our risk along the way.

This was nothing more I think in FXE than just the stock trading within a range that we want it to trade in and implied volatility more or less staying a little bit lower than where we had originally sold it. We had sold a lot of implied volatility when it’s up near the 100th percentile.

We’re still going to be pretty aggressive in FXE going forward. And we have a position now in June; we’ll probably add to that position, but we made adjustments to take advantage of where the stock had moved to and still managed to squeak out a nice little trade there. With BABA, we were able to get out of BABA as well with a pretty small loss compared to what it could’ve been.

We could’ve had probably about $145 loss on BABA if it moved against us and we did nothing. But with our adjustments, we were able to cut down our potential loss just to $33 which is amazing. Not able to turn a profit in BABA, but with this stock, it moved completely against us. And this was just last week. It was last week that the stock moved completely against us.

And because we were able to extend our trading timeline, hoping that the stock would just land range bound and stay sideways for the next week, that’s exactly what happened, implied volatility continued to fall in these options, and just allowed us to reduce our potential loss from probably about $145 or so, down to just $33.

The other trade that we got out of is Amazon. We bought back our entire iron condor on Amazon. We were able to cut our loss down on Amazon a little bit, but not too much. The stock still moved pretty aggressively outside of our range.

In this case with Amazon, this is a stock that was all over the place after earnings and we had an opportunity early to take a profit maybe, but we just didn't see the decay in the options. This is a great example here where you can see the stock just made a huge move higher. And just very similar to what happened in GoPro, the stock moved back inside of the expected range, but it just took a little bit longer for that to happen.

We probably could’ve held out just another day or two on this one, but it was playing it close to the edges as we get closer to expiration. I don't want to put ourselves in a position where we have a trade that maybe makes $200 or loses $200 within a $1 range on a $400 stock.

It’s just not the type of risk that I want to take, heading into expiration. We’ve reduced our loss enough on this trade. It was a trade that went against us, so we took a $251 loss on the Amazon trade. As always, I hope you guys enjoy these video tutorials. If you have any comments or questions, please add them right below.

As a reminder, all the premium members, if you are a premium member, you’ll get updates on the upcoming webinar that's happening next week on Wednesday. If you’re not a premium member, you can sign up and save your seat or go ahead and upgrade your membership, and all of these webinars, including all of the past webinars that we've recorded, are included in your premium membership. 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.