How To Place Earnings Strangles?

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Earnings strangle: In today's video, I want to go over all the trades; we made for Wednesday, February 4th. It was a pretty good day. We had two earnings trades at the very end of the day. It took a little while for these things to get filled. We kind of stuck with our prices on both UA and GMCR because we wanted to get about a dollar, a dollar fifty each for those.

We stuck with our prices; it took a little while to get filled, but they got filled right at the end of the day. If you didn't get those alerts, I'm sorry, I sent them out immediately as soon as we get them. It's all linked up; it goes out automatically from our accounts, so you get them as soon as humanly possible. Then we did have a nice little closing trade in VXX.

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earnings strangle

We're going to go over the closing trade in VXX. Now remember, if you go back in some of the video tutorials, we talked about how we had sold a back ratio spread in volatility as VXX was rallying higher. The whole idea here was that we bought the February 35 calls and then we sold two more of the 40 calls, which are further out of the money, to help finance that purchase. When we did this originally, we took in a very nice credit of $95. This is basically what we would have made had we let VXX continue to move lower, which it's done, and just expire worthless below 35.

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But we were able today actually to get an order placed, which is crazy, but we were able to get an order placed for a 30 cent credit. Not only did we enter the original trade at a $95 credit, but we also were able to buy it back at a negative debit, which is basically a credit, so we bought it back at a negative debit or a credit, and that added to the potential profit that we made in the trade.

A nice trade because we were able to take about $125 in profit on it. When you look at the chart of VXX, when we had originally entered the position back here towards the beginning, or towards the end of January expiration you can see that the market had a lot of implied volatility, but now that we've gone through a little bit of a cycle here and VXX is starting to move just a little bit lower.

The value of these options is starting to decay very fast due to faded decay. As a result, that helped to solidify this profit here. Still looks like a pretty good trade, and if volatility spikes we might replace this trade with another very similar trade for March, but for right now we're just gonna take the money and go to the next trade.

As far as earnings trades go, we had two today at UA, which is Under Armour, and GMCR, which is Green Mountain Coffee Roasters at Keurig, and we did a strangle on both of these. IF you didn't have the capital available to do it, or you didn't want to do the strangle, you obviously could have turned both of these into iron condors; you just have to buy the other legs. In this case with UA, we sold the 80 calls, you'd have to buy something higher than 80 to create an iron condor, and on the put side we sold the 66 puts, you'd have to buy something lower than 66 to create an iron condor.

With UA, we did decide to do this one strangle, and we did it for a $1 credit, so that moves our break even point up to 81 and down to 65 on this iron condor. Here's a look at where UA is kind of pre-earnings announcements. Done a little bit of a rally here and implied volatility is starting to creep up, so it'll be interesting. It's trading at the high end of its range. I don't know if that means anything as far as, you know, the stock may end up popping higher.

When we look at things like Chipotle, which yesterday was trading at the high end of its range before earnings, and then today got crushed down about $50. It doesn't necessarily mean that the stock is going to make a big move higher. It is trading up at the high end of the range so possibly, might see an uptick in Under Armour tomorrow if everyone is expecting a big move.

You'll notice that our strangle here in UA is very, very wide. A very wide strangle. I'm trying to take in as much depth and width as I possibly can while also taking in a pretty decent credit. When we look at where UA is as far as expected move, and obviously we did the weekly options which are close as far as time decay, when we look at the expected move you can see that Under Armour and the market's pricing at about a 5 dollar move on the stock.

We're well outside of that range on either end of the security by going out to 80 and then with our additional dollar, we're well outside the expected range on either end. I like that right now with the trade, so we'll see what happens as they announce earnings tomorrow. Again, that's the UA trade.
Green Mountain Coffee Roasters, pretty much the same thing except we tried to go a little bit further out.

This one has been known to have a bunch of pops and drops. It's been very volatile around earnings. We did the 140 calls the 105 puts and took in a credit of about $1.50. Again that $1.50 moves our credit, our break even points, out another $1.50 on either end. With GMCR, you'll notice that the expected move is just a little over $11. The stock closed at about 1:21, and you can see on the put side we're sitting at about a $15 move down below the market. We're outside of that expected range below and the same thing on the top side. We're way, way high on the top side. We're about $20 away on the top side.

I'm just assuming that at some point we might get maybe a pop or a surprise higher in GMCR. Really because the thing has been going down just a little bit and I think maybe it might buck the trend, implied volatility is insane right now. It's at the highest point that it's been pretty much in the last year. Maybe we might get something that kind of bucks the trend here and pops higher, but if it doesn't if it drops lower, we still got a lot of room on the bottom side, we're about $15 away. We left ourselves a little bit more room on the top side, just in case this thing moves higher. It can move higher very quickly.

Really like both of these earnings trades, they were the only ones we were able to get filled. We tried to get into some other ones like YUM and et cetera but just weren't able to get the fill. As always with these earnings trades, we'll look to manage these and close them out as soon as the market opens tomorrow so be ready. If you see a nice little profit go ahead and take it early, don't feel like you need to wait for our alerts. The whole idea of this service is to help teach you how to do it so you can do it yourself.

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