How To Hedge or Adjust Earnings Options Trades That Go Bad

Download The "Ultimate" Options Strategy Guide

Earnings options trades: In tonight's video, we're going to go through all the trades that we made on Tuesday, July 28th. It's getting to the end of the month here. Getting to the end of the week, but that doesn't mean we're slowing down with earnings trades or adjustments to earnings trades. 

That's basically what this video tutorial is about tonight. It's going to be a great case study or a reference guide that you want to use in the future about making adjustments for earnings trades, putting on new earnings trades because it's a lot to do with straddles and strangles.

Related "Earnings Options Trades" Resources:

earnings options trades

Let's start off by going through the roll and adjustment in Baidu. I'm going to go through the actual trades, then we'll look at it on the chart, and we can see where our position is right now. It's the same process and mechanics that we use on all of the trades that go against us if we have to make adjustments.

In the case of Baidu, the stock opened up well below the expected move, so naturally, what we had to do is move our iron condor. Again, this happens basically in two pieces or two steps. The first step is that we have to roll out the side that the market is moving against or challenging.

In our case, Baidu opened lower, so we had to roll our current July position on the weeklies at the 180/175 put spread from July on the weeklies out to the monthly contracts in August.

Start The FREE Course on “Earnings Trades” Today: When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Click here to view all 10 lessons ?

What that means is we're buying back the put spread in July, and we're reselling it out in August. The idea here is we're not changing the strike prices. We're going to keep those the same; we're not going to move them down, we're not going to move them up.

We're just moving that position out to the next month giving ourselves another 30 days. In this case, we ended up paying a $55 debit to do that side of the trade.

The next side of the trade or part two is that we're going to go back in and sell another call spread out in August and this time we created an iron butterfly because we matched up our short strikes.

We came as close to our current position on the put side as possible, and we sold the 180 calls and bought the 185 calls. Again, the whole idea of doing this side of the trade is that our current call spread in July, the weeklies is going to expire worthlessly.

That's away from the market. We're going to move that side in closer to where the stock is trading now. On this side of it, we took in a credit of $110. Again, as I always talk about, in both transactions, the whole idea is that the net effect of both of these, whether you pay a debit here or you get credit here, whatever the case is, but the net effect between rolling the position overall has to be a net credit.

If you can't do it for a net credit, it's not worth doing because you're going to pay to roll the option out to the next contract month. In this case, we had a net credit of $55 which helps reduce our risk even if Baidu does continue lower. That's the whole idea is that what we're trying to do here is reduce risk and give ourselves 30 days.

If Baidu never turns around and never comes back higher, at least we gave ourselves another $55 of credit to reduce the risk. That's why we always want to take in credit. Here's the trade in Baidu. You can see a major gap down in the stock, definitely unexpected.

Implied volatility has dropped, that's helped out, no doubt, that's what we want to see, but the stock move was a little bit much more than expected. Again, have the 180 puts below the market, which was here and then we have the 220, I believe, calls.

All we did is we rolled out the 180 puts to the next month, and then we moved down this call side, down to the 180/185 and what that does is that now creates an iron butterfly that's right on the market at 180. You can see, this is our new position that we're going to be working with for August.

Again, the whole idea here is that we're just protecting ourselves first. The first goal of making this adjustment is, take credit in case Baidu never recovers, continues to move lower. It's currently trading at about 168. If Baidu continues to move lower and never recovers, we'd at least reduce our risk by $55. That's the entire goal of doing this.

The second goal of doing that is that we gave ourselves a shot in case Baidu does happen to rally higher. You look at a lot of stocks like Amazon and Chipotle and Google, all of these stocks that opened beyond the expected move and now have come back inside of range.

That's all we're trying to do here. We're just trying to give ourselves a shot that Baidu moves back inside of our expected range, centers itself somewhere around 180 between now and expiration and gives us an opportunity to make some money back.

We've done it before in the past, and it doesn't always happen that way, but in this case, there's a probably a pretty good chance that maybe Baidu rallies back up. It's only less than $10 that it has to rally and that's not that much of a rally for $168 stock. That's the exact strategy that we used in Baidu.

We did almost the same thing in DD. DD also made a pretty big move outside the expected range. Again, the first thing that we did is we rolled out the put that was down below the market. In this case, we didn't have a put spread, we just had one naked put at a 57 strike, so all we did is use a calendar to facilitate that role.

With a calendar, basically what you're doing is you're buying the second month here which is they July 5's. We're buying back the July 5 weeklies that we were short and then we resold the August monthlies at the same strike price at 57.

Overall took in a net credit on that portion of the trade and then went back in and added the additional call side above the market as well. In this case, we went a little bit inverted because we have the strangle, so we move down to the 54 calls and sold those for credit as well.

You can see, in this case, on both sides, we took in credit. As long as you take in a credit on the overall roll, that's really what we're looking for. If you didn't take a $45 credit on the calendar or paid a $5 debit, but you still took in a $78 credit on the extra call, that's still an overall credit on the entire trade.
With DD, we now have a position that looks like this. This is our inverted strangle, and actually, the stock has moved back inside of the range that we want and we just want the stock to stay right where it is for another couple days. That's really going to help out with kind of the overall numbers that we have for this particular stock.

The fact that we have the short 54 call and the short 57 put, we just want to see the stock land anywhere in between our break even points here. Ideally in between those strike price which are inverted strike prices, and that's going to give us a good opportunity to potentially close this thing back out at a profit.

With DD, if we take a look at the stock chart right now, you can see, the stock gapped open lower, and that's when we did all of our adjustments, but since then, has rallied back inside of that range. Now that we've given ourselves a little bit of positioning and some more time, we can let time decay work in our favor.

It still can see a good drop in implied volatility over the next couple of days which should hopefully materialize into some smaller scratch or smaller profit that we might have on this particular trade. We also entered some new trades this week.

The first new earning trade that we did was in X and you can see what we did is just do a regular straddle right over the market, trying to take in as much premium as humanly possible. As always with these weekly trades and earnings trades, we're doing the weekly contracts that expire this week on Friday.

We did the 18 call and the 18 put, so we're short both the 18 call and the 18 put and took in a nice big credit of $1.48. Again, the reason that we're doing this is that US Steel has nice high implied volatility and that's what we like to see on these trades where we're making kind of a straddle or a strangle type trade.

You can see implied volatility's up in the 67th percentile. The stock is a low priced stock. It's a $17 stock, so it's not going to kill us to be able to do this trade for a naked position and hold the margin. You can see we ever so slightly tilted ourselves just a little bearish based on the last two days movement.

The key here is that the credit that we took in, the 148 credit is more than the expected move which is $1.33, so the market is expecting US Steel to move about $1.33 when it announces earnings and hopefully we should be inside of that expected range. The next trade that we did is on Twitter, so we jumped back on Twitter today.

We did two contracts in Twitter. Did a little bit wider strangle in Twitter just to give ourselves a little bit more room? Twitter's pretty jumpy and can be pretty move-y on either end. We sold the 42 calls above the market and the 30 puts below the market and did that for a $90 credit.

Basically how we decided where we were going to sell calls and puts on either side is we looked at the probabilities on either side of that particular strike price being in the money at expiration. What you can see here is that we targeted about the 15% probability level.

Things have moved just a little bit because Twitter did announce earnings after the close of business today and the market, so when we had originally seen this trade, it was a 15% probability on either end. You can see, now that Twitter is trading a little bit lower after earnings, that probability on the put side's a little bit higher.

That's all we did is we looked out at the probabilities and said, "You know what? We're going to place each side at about the 15% chance of being in the money." That gives us an overall success probability of about 70%, if that Twitter trades somewhere between 30 and 42.

Right now, after hours trading, Twitter is down to about 34 1/2 so looks like it should be a pretty good trade tomorrow unless Twitter tanks overnight. Twitter is trading right about here. Our break even point on the bottom side's about 29, on the top side is about 43.

The next earnings trade that we did was in Yelp. We went ahead and did another straddle in Yelp, sold calls and puts right over the market, the 33 1/2 call and the 33 1/2 put right where Yelp was trading and took in a massive credit of 475, so $475 in Yelp. Again, Yelp is going to be a stock that moves.

It's a tech company, a dot com, implied volatility is really really high on Yelp, and the stock's been on a down trend so who knows where it could have landed, but we just wanted to say, "Let's put this thing right in the middle of the range, hope that Yelp doesn't make too big of a move in either direction."

Right now, the stock is trading down to around 28 1/2 or so, and so it is testing us on that lower end of the range, but our straddle that we did right at 35 is now going to be challenged just a little bit tomorrow. We'll see what happens, where Yelp opens. It's trading right now just below our break even point on the bottom side, so about half a dollar below our break even point, which would put us at about a wash on the trade.

Again, we'll see what happens tomorrow when Yelp opens up. If Yelp opens up below this price point, obviously we will go through the same technique that we did with DD today. In that case, we're going to roll out the 33 1/2 put that we currently have that's being tested.

We will roll that out to August, so we'll roll that out to the monthlies and then what we'll do is we will add a new position, probably somewhere around 29 or 30. We'll sell another call option in August around 29 or 30, again, trying to take in as much premium as possible, trying to recenter the trade over where the market is right now.

The last trade that we did today is another iron butterfly in FXE. This is very similar to the trade that we did earlier this week. We went ahead and sold the 108/118 call spread, and the 108/98 put spread, so it's a $10 wide on either end, iron butterfly.

Took in a nice big credit 433 and this is, again, basically just one of those trades where we're just continuing to add and add to our position in FXE. You can see right now, we've got a perfect centered position in FXE, right over where the market's trading right now. Got a lot of premium in here and that's because it's very liquid and FXE still has high implied volatility.

One of our things that we're trying to do is try to continue to leg into more and more of these positions and kind of spread them out and stack them over time versus just throwing a bunch of money into this at one time and saying, "Okay, here's all of our money in one position." No, we're going to kind of spread this out among different strike prices.

Now you can see we've got a cluster of options that we've bought. We've got a cluster of options that we've sold on each side and same thing up above the market on the call side. We've got a cluster of options that we bought. We're now starting to spread our trade out over the course of the next couple weeks.

Start to build a nice big position in FXE; it's worked well for both FXE and FXI over the last couple months. We're just going to continue to do that same type of trading methodology and strategy. Rather than throw everything all into it at one time, we're going to spread it out over the next couple weeks and months.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the trading section 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.