KSS Post Earnings Strangle Adjustment Step By Step

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Earnings strangle: We are going to go over just the two trades that we made today. One is kind of a combo hedge trade that we made in KSS which is Kohl's which announced earnings today. The other is just a very simple closing trade in Cisco.

Quick, just to get it out of the way, is our Cisco closing earnings trade. Cisco opened up sort of towards the high end of our range that we were expecting but we were still able to take this thing off at a nice little $22 profit. Again, really nothing here to report.

I mean, Cisco opened. It was a little bit of the range of what we were expecting. Not as big of a profit as we would have hoped but it's a nice winning trade all the same.

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The other trade that we have is at Kohls. I want to go over the actual adjustment trades, and then we'll talk a little bit more about kind of where we're at and pricing and things like that with the actual chart. Kohl's opened lower today, much lower than our kind of our wings of our strangle that we originally had.

The first thing that we did, as always when the market tests or challenges one side, is that we adjust and roll that side out to the next month. In this case, with Kohl's, the August contracts are acting as the weekly contracts because they expire next week. So we rolled. Our first trade was rolling out the 60 puts from August to September.

We stayed with the same contract for the same strike. We just moved it from August to September. The way we did that has we facilitated that order with a calendar spread. That gave us an overall credit of .78. Again, that helps buffer that initial credit that we had of $272. We add another $78 to that credit. That helps widen out the break even points on this trade.

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Now, with Kohl's trading much lower, again, what we did is we went out to September and now sold a naked call at 60 so creating a straddle, right, over the market at $60. In the September contracts, again, taking in yet another credit of $75. Again, we had our original trade which took in $272.

Now we've added a $78 credit and a $75 credit. That brings us to a total of $425 in overall credit that we've taken in for Kohls. What that does is moves our break-even point down $4.25 from the price that it's at right now or the strike price that we have on these trades which is the 60 strike price.

That means that our new break-even price in Kohl's is $5.75 or so. When you look at the chart of where Kohl's is trading right now. I'm sorry. $55.75. It is trading inside of the range that we want it to be, kind of post adjustment. Now you can see, we had that drop in implied volatility which was really important.

At this point, we're trying to save some money and get back our profit on this thing or get back to even zero because of that move outside of the expected or outside the norms. We only thought Kohl's would move down to maybe $59 or so and it moved all the way down to $55.54 at one point during the day. It was trading down in that range.

Again, all we tried to do is roll out to the next month. Move our contracts, and if you can see where Kohl's is, you can see we moved our contracts from the August position out to the September position, and you can see, we're just basically pinning everything around the 60 strike.

Not going inverted at this point because we have a nice, big, massive credit that we've taken on the entire trade. When we look at the profit/loss diagram, you can see it's got that nice straddle shape on our profit/loss diagram.

This is just the remaining contracts that are left for September. You can still see these contracts have a break even point that's a little bit lower and it kind of ... our ... officially shows us a lower point than what we have right now. With the calculations that we just showed you how we added up our credits and reduce that from the strike price, you can see our break even point on this trade heading into September is somewhere around $55.25.

As long as Kohl's stays in that range or higher, we actually tend to, or could, have an opportunity to not only reduce the loss on this trade but also make a nice little gain if we continue to see a drop in implied volatility and maybe a little bit of a stabilization in the stock price.

We'll have to play it by ear from here, but that's what we're rolling with right now. And again, the whole idea here is just to make back some of the money that we could potentially lose. The idea that you don't want to do is just sit there and just let it go all the way through expiration and just take the loss.

You can always do something to adjust and extend your trading timeline, get some additional credit, widen out that break even points, which helps you in the long run. As always, hope you guys enjoy these videos. If you have any comments or questions, please let me know in the comment section right 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.