Kicking Off Earnings Season With MON

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Earnings: Tonight, we’re going to go over all of the trades that we made on Tuesday, January 6th. We had two new opening orders and finally got started in earnings season as we talked about last night on the video update, and then an opening trade on bonds and stacking a position in bonds. And then at the end of the video, we’ll talk about the fact that we got assigned one of our short calls early in USO.

We ended up closing out of that position by buying back the other two short calls that we had at the 20 strike. And some people got assigned this position; I know a lot of other people didn't, so we just wanted to let everyone know that we did get assigned this position. Therefore there are going to be no closing orders for the actual options because of the stock assignment.

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First, let’s start with Monsanto. We had mentioned on the weekend strategy call on Sunday night with the premium members that this is one of the ones that was on our list. We had another one that we would've liked to trade today, but we just didn't get the pricing that we were looking for and didn’t get the fills, so we are going to stick with the Monsanto trade.

We did sell a strangle on Monsanto with the weeklies, so anytime that we send out an alert around earnings, apparently… And we say this in the “getting started” video too. But unless we specifically designate all of the trades that are monthly contracts because that’s what we focus on, but if we ever make a weekly trade, then you’ll know that these are the weeklies and we’ll designate that in the trade alert.

Same thing here you'll notice that it’s going to be the front weekly which are these January options, this Jan 2s which is the second week of January, those are when those expire. And we did the 121 call above the market, and the 112 put below the market for a total of $61 in credit, keeping this thing small.

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Let’s look at the setup on this. With Monsanto, you can see implied volatility is already high, it’s up in the 76th percentile, so that's great because implied volatility is starting high for earnings and we know that we’re going to get some implied volatility crush after earnings because that’s historically what happens, that’s why we do these trades.

But thankfully, we waited until just the day before they announced because they announce tomorrow morning before the opening bell because the stock has made a move from about the low 120s all the way down to about 116 in the last couple of days. It's exquisite to wait until that last day or the last session before the stock announces earnings so that you can get very neutral with your position.

Now, when we go into the trade tab and look at the different strikes that we selected, you’ll see here that we did the 112 below the market and we did the 121 above the market. Now, why did we select these strikes? Well, they were both outside of the expected range that the stock was going to move in. We can see here inside the platform that you can calculate that expected range.

Right there, you can see it with that MMM, and it says that tomorrow after earnings, it looks like we could get a move of about $2.80 in either direction. What we did is we took that, and we moved out just a little bit further on each end. We’re just giving ourselves a little bit more of an edge by moving just a little bit further than $3 out on each end, giving ourselves ample distance for the stock to move after earnings and hopefully see a really quick drop in implied volatility, a really quick drop in the value of these options, and we should be able to buy this back very quickly at the opening bell for a nice little profit.

We’ll see what happens tomorrow, but that's the setup. We want to move outside of that expected range. There’s a video inside the membership area right now that we just loaded that talks more about calculating this expected move. If you don't have Thinkorswim or you have some other broker, we went through a whole tutorial on how you can quickly calculate what the expected move is for earnings, so go ahead and check out that video.

Alright, the other trade that we did today is an iron condor in TLT. Now, we already have a TLT iron condor for January, but we added one now for February. Because bonds have been going crazy as the markets had a little dip here, implied volatility has remained high in bonds, the pricing has been pretty good, so we decided to stack another iron condor and stack or ladder these trades out over the next two months.

Now, we already have the iron condor for January; we haven’t touched that. We’ll likely make an adjustment on that either tomorrow or Thursday, Friday this week. But right now, we’re just letting it sit and see what happens with stocks as we end the week. But with this iron condor, we did the 138/140 call spread above the market, and the 123/121 put spread below the market, taking in a total credit of $.38. Now, this is relatively neutral as far as how the balance is of this iron condor.

If we go to TLT which may or may not be working because the charts are running slow tonight and it looks like they are… Here are the profit and loss diagram instead. As you can see, this is the February contracts that were looking at, and we're kind of neutral in how we put this trade on. It’s got a slightly bearish tilt to it just ever so slightly, but we want to be pretty neutral heading into February because at this point, bonds have been really high, so there's no telling if it's going to continue to be strong or if they’re going to fall off the map from here and turn around.

We just don’t know, so we want to be fairly neutral, but I do have a slightly bearish tilt towards this, and that’s okay. You can sometimes tip the strategies the way you want. But you can see that our trade has breakeven points that are real, really wide. And that’s what I like about this trade. With implied volatility so high, we can get very far out of the money for the trade and bonds.

If we go to the actual the trade tab here, (and let me just open up February) you can see that we made this trade well outside of the one standard deviation range. We have on the lower side of the trade the 123s, they’re at about a 13% probability of being in the money, and the 138s are about a 20% chance of being in the money.

We have an exquisite high probability trade on our hands. It's not a crazy 90%, 80% chance of success, but we’re taking in a pretty good premium along the way, and I think that that's a superb trade. I like the iron condors and bonds. I love trading bonds. I believe that they're just a good vehicle because they don’t move too much after they have these one-off spikes.

The another thing I was just going to mention is we are trying to get into some positions in VXX and VIX. And hopefully those charts will load here, so maybe they will or they won’t. But as implied volatility continues to rally higher… And I’ll just talk through and hopefully; these charts will load. But as implied volatility continues to run higher, we’ve been profitable over the last couple of years trading VIX and VXX which are just pure plays on volatility to the downside, so trading bearish strategies.

Whether that's buying debit put spreads or selling call spreads against them, whatever the case is, we’ve been profitable doing that. We tried to enter some trades in that today, but we didn’t get a chance to get any fills at the prices that we were looking for, so we're going to go back and try to do it again tomorrow and hopefully implied volatility stays high. But I just wanted to give you guys a heads up on that as we head towards the middle and end part of this week that we are trying to get into some of these trades. As you start to see, implied volatility jumped up; it's prudent to try to get into some of these trades and naturally close them out for a profit.

Alright, the last thing that we’re going to talk about is the stock assignment for USO. We were holding the short 29 calls in USO. And obviously, USO is much lower than that. But ahead of expiration, we got assigned the stock, so we were then long 200 shares of stock at 29. And being long stock is okay if you wanted to hold it. I knew that some people had emailed and said, “Hey, I think USO is small. I’m going hold onto the stock for a long time and see if it can’t come around.”

That's great. That’s fine. You can do that. You can hold onto the stock. I think the only thing that I would say that is that it’s capital intensive to keep the stock that long. I think you can replicate that same type of strategy i.e. being long stock doing something different, whether that's a synthetic strategy where you buy a call and sell a put at the same strike or whether you do an enormous debit spread and do it just far, far out in time.

I think you can replicate it without using as much capital to do that. I’m not a big fan of that. We sold out of the stock right away. And as a result, we just had the 29 calls that we’re short. These were profitable, so we went ahead and just closed those for a $.25 debit just to close the whole position overall. I just want to let you guys know that we did get assigned on that end of the trade.

I know some people didn't. If you didn't, feel free to continue to manage the position as we teach and taught inside the platform here or close out the position if you’re just a little bit too nervous about it heading into expiration. As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them below. And 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.