Quick IV Drop In Pandora Helps Strangle Strategy Win Out

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Strangle: In today's video, I'm going to go over all the trades that we made on Thursday and Friday of this week. So, I'm actually out of town at a wedding, a very good friend of mine is getting married in Virginia, so I haven't been able to do it last night with the rehearsal dinner. So I want to get this out today.

First, I want to say, Thank you to everyone who replied back after the rant video that we sent out. And I guess, I don't know, I guess maybe I need to do more of those, although that's not necessarily in my nature to do that I got a flood of emails from people saying how much they enjoyed it and they liked it. 

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One person even asked me to keep yelling at them because they enjoyed it. I know that's weird but it is what it is, but I appreciate all the feedback, and obviously, you guys can see how passionate I am about, you know, helping you guys and trying to make this work for everybody.

So, in tonight's video, I'm going to go over, like I said, closing trades and opening trades, adjusting trades we had for Thursday and Friday this week. We'll start off real quick with Oracle. Oracle had announced earnings on Thursday after the close, subsequently, it's stock jumped after earnings, but then once they got on the corporate call, it looks like the outlook for the leadership team and the executives at Oracle wasn't too good.

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So the stock ended up falling and quickly after that happened we were able to close out the trade early in the morning, a couple of minutes after the open, for a 12 dollar debit. And again, this is a January position, so these are all the way on January, there's not point in holding this kind of more than our profits are going to, you know, trying to get these things off the books pretty early.

And, in fact, if you ended up holding these things a little bit longer or not closing out of them, you know, right away, you'd probably end up making, even more, money on Friday by getting into this trade late. So, I know we get a lot of emails from people saying, "hey, I can't get into your trades right away.

Does that affect my position?" And sometimes it does, sometimes it might negatively affect you because you can't get in at the right price. In this case, getting into it late or the next day ended up creating a much bigger win and profit potential. So, in our case with Oracle, it was good.

After earnings, stocks and [inaudible 02:02] dropped, it all worked in our favor, you know, took a nice seven-figure profit off that trade. On Thursday we were also able to close on our first Pandora Strangle. This is our December strike that finally came in.

Now, this is an interesting trade, and we did close out of yesterday on Friday, the January Strangle that we had on Pandora as well. But this trade took, at least the December options, literally took all month before they showed a profit. And a meaningful profit.

I mean, we're talking at some point it was up maybe 2 or 3 cents and from where we had sold it. But it took all month to show a profit. And that's mainly because implied volatility was so jacked up at Pandora and then for some reason just dropped like a rock on Thursday and Friday.

And you can see, just like how big of a dramatic drop implied volatility was, I mean, it was up in the hundredth percentile, for pretty much most of the back half of the month and then dropped all the way down to the 20th percentile. Even though the stock went from 13 to 16.

And is just shows the power of implied volatility as it regards to options pricing. Even though the stock jumped 3 dollars for a low teen stock, which is a huge move, it's almost 10 percent or so. The implied volatility drop created a huge profit potential for us in the straight.

And that's what we're looking for; we're playing that drop in implied volatility. And we're not trying to play the long-term directional movement in underlying stocks. So in this case with the first Pandora Strangle that we closed out of, we closed it out and took a 142 dollar profit on that trade.

I'll skip over Solar City and come back to it because we did close out of, as well on Friday, the January position that we had. This one we bought back at half of our profit potential target. That's an automatic closing order that finally got filled on Friday. And this took us out again at a 90 dollar profit.

So, very successful month continuing to trade Pandora. If implied volatility jumps back up, then we'll get back into the stock. But right now, it doesn't look like it's got much volatility left in it after going through what it did on Thursday and Friday. The other trade that we had obviously was the adjustment to Solar City.

Now again, what we're doing with this trade is adjusting and rolling up our puts. So we had 42 puts, we had two of those, and so we bought back to close, those 42 puts because they're worth not as much as we could potentially get for the 55 puts. And we rolled and opened the 55 puts.

So you can see that we opened the 55 puts, we closed out of the 42 puts. This gives us an inverted strangle around Solar City. And again, all we're trying to do here with these adjustments is give ourselves an opportunity where if the stock comes back inside of our range, which is still generally 42 to 55.

And I'll show you that here in a second on the risk diagram, but as long as stock comes back inside of this range sometime in January, that gives us an opportunity to take this thing off still potentially out of profit. So all of our credits that we've added into now with Solar City, I think we even mentioned in the comments, we should be at about 1677 at least for our credit shares might be a little bit different.

But all of the credits that we have here in Solar City are at 1677 so as long as this stock comes inside of 42 and 55 and lands somewhere in that zone, we still can turn a profit on this trade for the entire month. Which is pretty cool. So, we'll see what happens, we need to be implied volatility to drop for sure, and we need the stock to kind of calm down and come back a little bit.

Which it may well do as we talked about in the last video. But here you can see this is our new position in Solar City. And every time that we roll up our puts from say, 42 which was here, we rolled them up to 55, all we're trying to do is just trying to get a little more balance over-top of where the market sits right now.

So, you can see the stock is here, right sitting right about here about 55, 56, and we'd love the stock to come back down and trade down in this range.
But right now the best strategy that can use is to roll up the side of the market is moving away from - that's the put side.

Had we rolled up the call side, that's a great example of why we don't do this, had we rolled up the call side from 36 to 42 to 55, we will just keep compounding losses. You would close out a losing position because you have to roll it up. You reestablish a new call, subsequently higher than the market.

And then the market just continues to move beyond that strike. So graphically it would look something like this. If we had our original position, maybe you had 40 or 42 strikes, the stock moves beyond that, so you roll that up to say 45. Then the stock keeps moving so now you've banked a loss on this trade, you've banked a loss on this trade.

Now you move it up to say the 52's or 53's; you bank a loss on that trade. You keep rolling it higher. You keep banking losses. And I don't ever agree with that strategy because you can see how quickly you can just compound the losses. In our case, we have the 36 calls and the 42 calls that we have.

We're just going to leave this. If they're going to be losers, they're going to be losers. But what we're going to do instead is we're going to keep rolling up our put side higher and higher and higher. And as we do that, we're taking in profits on the trades that we close out of on the put side.

So if the market is going to keep running higher, we're going to keep rolling up the puts, sell them. The Market runs higher that decreases the value of our put options, we'll buy them back at a profit, at least on those legs, and then resell something a little bit higher. And, I think that's the best strategy to use in this case. And again, it only works if you keep your initial position size small.

So in our case, we have two contracts that we're working with, it's obviously not a huge position, but it's enough to keep us engaged in the security. And that's going to be our strategy, so as long as Solar City doesn't continue to move higher, in which case we might continue to roll up the put side, we'd love to see the stock maybe next week move down a little bit or at least calm back down.

And you can see it's maybe losing a little bit of steam on the top end of the curve here. As always, I hope you guys enjoy these videos. If you have any comments or questions, please let me know or add them in the comment box right below this video. 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.