How to Close an Earnings Trade (NFLX Live Example)

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Earnings trade: In this video, we're looking live at the markets. It's about a minute or so before the markets open here today. And what we're going to show you in this video is what you want to do as you go through the process of actually waiting for the markets to open and taking off trades that should be profitable trades.We're going to go through that here in the video. Again, there's maybe about 45 seconds or so to go until the market opens.

We're going to go through that here in the video. Again, there's maybe about 45 seconds or so to go until the market opens. What we're focusing on is our one and only earnings trade today which is Netflix.

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Now, this ended up being a nice winning trade, or it should be a winning trade after the market opens. Stock right now is closing a little bit down on the day about $104. But our call strikes and call spreads were up around $125. On the put side, they're down around $95. It should be a nice winning trade.

The stock moved less than expected earnings. Now again, what we're trying to do with Netflix is take advantage of this implied volatility drop. It's still premarket; market shows up in about 15 seconds. But what you want to do when you get out of these trades is you don't want to enter them right at the open.

I mean, we do want to close them close to the open, but we want to let the market have time to open, have time for the market to start trading some of the actual securities and options so that the price does begin to fall. Again, the market is not open right now. You can see it just opened right now.

But we want to see some of that volume start to come in here and we want to start to see some of that option pricing reflect the fact that we're now past this one-time earnings type of event.

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You can see the stock opened up. It's still down lower on the day. But now, what we're going to start to see hopefully is that drop in implied volatility. Here's a stock opening up lower. And again, we're waiting to see that drop in implied volatility in pricing before we go ahead and close out of the trade.

And you can see that most of it are already starting to come through. We now have a $128 profit on our hands. Our 85 call spreads are practically worthless. Our put spread that we sold for $92 is down to 45. The first thing that we're going to do obviously takes care of the side of that the market is moving against.

The market is moving against our put spread side, so we're going to place an order in to close out just the put spread side for right now. The call spread side is in the opposite direction. There's no need to go ahead and close out that side of the trade. Let's go ahead and place an order here for about $.30 as far as a debit. And we're just working it here just to see what it's going to come in at. And we're going to place that order, and see if that order gets filled pretty quickly.

You can see immediately; we got filled in that order and that happened very quick. But again, you do want to close these things out early in the morning, but you just want to wait just a little bit, you don't want to be too jumpy. We waited about two minutes or so here to close out that side of the trade.

The other side of the trade for all intensive purposes, we could leave on and let it expire since it goes to expiration tomorrow. What I usually like to do is at least close out of just the short strike. In this case, if we bought back the short strike because this thing can turn around on us completely.

The actual spread is worth practically nothing right now, but we want to buy back at least that short strike in case for some crazy reason this thing turns around. It's done it before, not only in Chipotle and Netflix and Apple and Yahoo. I mean, there's tons of case studies that show that this thing can turn right around pretty quickly.

What we're going to do now is just place our working order to go ahead and buy back just our short option which is the 125 calls. We're going just to buy that back for about $3. And again, it's worth the $5 in risk to get that trade off the books and buy it back. You can see we got that working order in there to buy it back at $3.

That trade should fill pretty close to that price. And really, we're not doing this because we necessarily think the stock is going to rally back up. We're just doing it to see why it protects our butts here. Hopefully, that helps out, just going through a live trade as the market opens. You can see now that stocks already opened, implied volatility started to drop on the charts, and again, a lot of the volume and activity and the stock has already started to come through.

We see a lot more volume on both sides of the tape and the chart here which is good. As always, I hope you guys enjoyed these. If you have any comments or questions, please ask them right below in the video comment 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.