MU Earnings Trade Banks Quick Profit

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Earnings trade: We're gonna do the video update for all the trades that we made on Friday, October 2nd. So this is a weekend update. We had a fairly good week. Honestly, we were pretty much prepared for the market to drop and continued to make money consistently all week which was great.

Also closed out of our first earnings trade in MU. So went ahead and bought that back right after the open. Netting us a nice little 40 dollar profit. Not as much as obviously we hope, but it's nice to get another win under our belts. Again with all of these earnings trades, we always do the earnings trades, for anyone whose new or new people who have signed up in the last couple weeks.

We always do the earnings trades very close to the end of the day. That's why we send out the earnings watch ahead of any earnings trades we might do towards the end of the day. That's because we want to give ourselves as neutral of a direction on the stock as humanly possible. 

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earnings trade

So if we trade it early in the day, and then the stock runs up five dollars or 10 dollars, we don't get that true neutral positioning that we need to make the earnings trade worth it. Because again, what we're trying to do with an earnings trade is just profit from the drop in implied volatility. That's all we want to see is that profit from a drop in implied volatility.

And so we have to make sure that we are neutral to the direction of the stock as much as possible. That means we open the trade close to the end of the day and we close the trade right after the stock opens, and we get that drop in implied volatility assuming we don't have to make an adjustment or anything like that.

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So there are no profit targets that we necessarily go after. We obviously always try to make as much as we can on some of these earnings trades. In this case, with MU, we traded again the 15 1/2 call and put straddle right over the markets. You can see that the stock opened up higher than where it closed the last day.

So the stock opened up here which was right above 15, and because we were able to close out of the trade early in the morning that gave us a nice little profit. Had we waited until the end of the day, and again this is why we close out of these trades early in the day. Had we waited until the end of the day, we definitely wouldn't have had any profit at all because the stock closed beyond our break-even point at 15.91.

So now you can see, this is why it's important that we close out this trade early in the day. And again, we are just trying to take advantage of that implied volatility drop which we had in MU. So hopefully that's a good little case study, and again we will have many, many earnings trades, so I'm sure there will be plenty of opportunities to learn how to do those and follow those.

Two new trades that we put in today. We did a straddle in HPQ. We went out to November because October is just really to close at this point and did the 26 call and the 26 put for 246 credit. Took in a nice big credit. Again, HPQ, we're now past any of the events that, earning and dividends things like that. SO we can do something a little bit more aggressive in HPQ, and it's got high implied volatility right now.

And again, you can see past all of these events that are necessary or that we would be worried about if we were making a trade all the way out in November. So we don't have to worry about dividends. We don't have to worry about earnings. And now you can see implied volatility up around the 65th percentile, so it makes it orally, really nice to sell implied volatility.

And we are doing this trade or were doing this trade about the time that we entered it just a little bit bullish just because we need the couple more bullish positions in our portfolio, so we're doing it a little bit more bullish. Centering everything right around the 26th strike. That gives us plenty of room to our credit and our break-even point is about two dollars and 50 cents out on either end for HPQ.

The last trade that we got into on Friday is the vertical call credit spread. So this is a bearish call credit spread on XLF. I just think the financials look week. I mean with everything going on right now. The market doesn't look that strong, and I think financials look week. It just warrants a position in financials.

We went again and sold the 23, 24 credit call spread. So, in this case, we are selling the 23 strike. We are going back and buying the 24 strike. That took in a credit of about $25. So nice credit on that particular trade. I like the back that with this credit in XLF we take in credit that is equal to the risk in the underlying trade.

And what I mean by that is that the credit that we take in is equal to the probability of our short strike being in the money. We always have to do that, so we a get fair pricing on these trades. That's the difference maker between making money long-term with high probability trading and losing money is being able to get fair pricing.

Because we did this thing just a little bit close, we wanted to make sure that this was a little more of a bearish trade in nature. And although the stock ended up rallying towards the end of the day by the time we entered this trade, I still like this trade. Implied volatility is already started to drop and kind of suck some of the value out of this.

At the time we enter the trade implied volatility was around the 53rd percentile. So you'll notice that we weren't trying to be overly aggressive. We didn't do a straddle, or a strangle. We just did a very simple credit spread. We're directionally playing the stock. So with our first strike at 23, we are directionally playing the stock lower.

We're giving ourselves an opportunity to continue to make money if the market for financials continues to erode over the next couple weeks. I think it could so that's why we're giving ourselves a little bit of downside exposure here in financials. As always, I hope you guys enjoy these videos.

If you have any comments or questions, please ask them in the comments section 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.