MU Opening Earnings Option Trade

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Earnings options trades: In this video, we're going to over the earnings trade that we did have for October 1st. This is a trade that we had been eyeing for the last week and this week. We let our members know earlier today that we are going to be doing something in MU today.

We ended up doing a straddle because implied volatility was high in this particular stock. Let's wrap up everything that we did here with MU, go through ... Since it was our only trade today, we'll go through it here a little bit more in depth than we usually do.

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With this particular stock ... Let's just go to the chart here so you guys can see the set up that we have. Here's the setup. The stock has been more or less in a downtrend. I'd say heading into this; it's probably safe to assume, at least at the time that we made this trade, that a lot of d risk in the stock may have been to the downside, right?

The stock has declining earnings and so now we have to see does the stock continue to fall? I'd say I want to lean a little bit towards the bear side just because of where the stock was heading. Now, with implied volatility, it was up in the 80th or 85th percentile today so very, very high implied volatility.

What this means is that we have to be super, super aggressive in what we're doing with our trading. We got to do something very aggressive, naked if possible, and something where we're selling at the money options.

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In today's case, we did the straddle which is the most aggressive strategy that we could do. Statistically, it's the best strategy that we could trade if this particular setup were to come up over and over and over again. What we decide to do is sell the 14 and a half call and the 14 and a half put on MU.

Again, we did this on the weekly, the front most contract because that's the contract that has most of that implied volatility "juice" built into it. That's got a lot of premium and pent up value because of this earnings announcement. As soon as we get through earnings tomorrow, then the stock will see a huge drop in implied volatility, and that's where we can potentially make some of our money.

Now, because the stock was trading in a nice expected range of about a dollar 28, we were able to get a credit that gives us a move outside of that expected range which was about a dollar 30. That's credit that we took in. Again, you're going to add that credit plus or minus to the actual strike price of 14 and a half.

Now, on the trade tab for, you can see this is the strike price 14 and a half and we sold the put on one side and a call on the other side. Again the expected move for the stock, right before the announcement was about a $1.28 ... Has begun making a move of about $1.40 right now.

Right now where the stock is sitting is right at our break-even point, about a dollar 30 or a dollar 40. It's trading at 15 80 after the market closed today. You can see on the profit loss diagram. This is where the stock makes the most the most money. This is where we make all of our money if the stock were to close tomorrow at 14 and a half.

It made a move right at the expected target. So, the market was pretty fair priced. The stock made a move that the market was expecting. It didn't over perform; it didn't underperform, it's right at our break-even point. Tomorrow when the market opens up we will be looking to close out this trade.

Hopefully, close out this trade on a small scratch. Either a small win or a small lose. That's what we will be looking to do. Hopefully, that helps in what we are trying to do with MU today, as far as earns trades. As always, if you have any comments or questions, please let me know. Add them right below this video.

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.