Aggressive Option Selling Strategy Pays Off In HPQ

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Option selling: In tonight's video, I want to go through all of the trades that we made for Thursday, May 21st. So, we had a pretty good day. I'd say closing out two nice profitable trades and then also entering a new trade in HPQ. So, let's go over the earnings trade that we did in Hewlett Packard.

So, this is our new opening trade inside the platform here, and you can see all we did, in this case, was sell one straddle in HPQ, and we did so on the weeklies. So, we tagged naturally this alert with the weekly, so you guys know that it wasn't on the monthly contracts and we did these on the May 4 contracts. 

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Now, remember with these weekly trades that May 4, this is going to be that tag for the weekly options. And basically what that means is that it's the May contract month, but it's the fourth Friday in May that those expire. So that's what the May 4 stands for. And in this case, we went a little bit outside of ...

I'm sorry, we did this trade right over the market but just a little bit bullish. So we did the 34 call, and 34 put so we did the straddle right over the market and took in about $1.91 in overall credits. So a pretty healthy credit for HPQ. So here's the set up in HPQ. The stock has just been pretty much straight range bound and sideways for the last month and a half or so.

And in plat volatility, on the other hand, has been real, really high. So it's up in the 98th percentile. This is why we decided to go with something that's a little more aggressive like a straddle because with a plat volatility this high, up in the 98th or 90th percentile, this really means that premium in HPQ or option prices are swelled to one of their highest points that they've been in the past year.

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So when that happens, we want to be as much of a net seller as options as humanly possible. And so that means taking a little bit more of an aggressive stance selling just pure options and not buying any options for protection. So it's a little bit more of a margin-intensive trade. It's going to carry a little bit more margin to hold this position, but overall we're going to take in a much bigger credit. Now as far as the actual trade goes in HPQ, the move that we were looking for that the market expected was about a $1.80 as the expected move up or down in HPQ after earnings.

Now with a $1.80 move our position got us outside of that $1.80 move because we took we took in a credit of 191. So that's what really helped us in this case because in plat volatility was so high, the credit that we were receiving was definitely more than the expected move of the stock and we just ever so slightly tilted this a little bit bullish, which ended up being a good idea, because the stock actually closed today at $33.83 and we did the 34 straddle right over the market.

So we just wanted to tilt this just a little bit higher so that we have ourselves a little bit more of an opportunity because this stock had rallied throughout the day. Now again you can see our position right here in the 34s. Now one thing I wanted to highlight to you guys is that we could have easily done the 33 and a half earlier today.

So I know I got a lot of people that said, Kirk, why not do the 33 and a half straddle instead of doing the 34. And the reason I decided to go with the 34 even though it's a little bit bullish or bearish or whatever the case is, but the reason I decided to go with kind of the more round number strike is because when we look out to the next contract month which is June out in 29 days here, you can see that the 34s have a lot more activity and liquidity.

On both sides of the market, the 34s are much more liquid than the 33 and a half. So kind of forward thinking here is that if we did get into a situation where we had to adjust or roll this trade because HPQ goes against us after earnings, then we'd be rolling into a better situation or a more liquid market by sticking with the 34s. And you can see that just means that there's more liquidity.

That means we're probably going to get a little better pricing. A little less slippage. If we went with the 33s and a half and we tried to roll into the 33 and a half for the next month you can see, although there is a small market there to pretty much take our position, it's not a huge market by any means. So our position is going to be a little more difficult to roll to the next month.

So again, what we're trying to do here is just do a little bit of forwarding thinking, forward looking and plan ahead in case the trade does go against us. Now risk profile wise, HPQ already announced earnings. After hours the stock is trading at 34.28 5. So right inside the expected range, we were looking for.

In fact, if the stock opens up anywhere in here we should make a pretty decent profit on this trade to kind of round out the earnings this week. But our breakevens are nice and wide. Up around 36 and 32. So we've got a good window of opportunity here for this trade in HPQ. All right so earnings trades that we've closed out of. We went ahead and bought back our call side of CRM earnings trade this morning.

CRM gapped a little bit higher but didn't gap further than our strike at 75 on the top side. So we were able to buy that back shortly after the market opened for a $35 debit. We're just going to let the put side expire worthless. There's no point in closing that out. It's worth about $1, so it costs us more to close it out than to just let it expire. And we took a nice $59 profit on CRM.

Now again, what happened here with CRM was that we had the options that were at 75. The stock did open just a little bit higher on earnings but never rallied up to that 75 level. And you can see what it did do is it did have a nice drop in implied volatility. That's really what we expected. That's what we wanted to see. And you can see it consistently happens here for CRM. So there was no surprise there, and then we were able to take some money off the table.

The other trade that we got out of today was one of our bigger, kind of position trades that we had. Not bigger but it was a position trade that we have had on for a little while here. This position back in April I think. Or maybe even in the beginning of May, late April. It was a big wide iron condor in FXI, and again we're just trying to take advantage of the fact that at the time FXI had high plat volatility, so we had the 55-57 call spread and the 45-43 put spread.

Went ahead and bought that back today right at our target at about half of what we had sold it for. So took a nice $90 profit on FXI. And again really this is all just a matter of implied volatility continuing to head lower. That's what we expected, right? We sold options when implied volatility was high and pretty much FXI has just traded sideways since the time that we sold these options.

So it's helped us out that the stock has traded sideways and implied volatility has dropped which apparently made this position pretty profitable fairly quickly. So it was a good trade in FXI, and we've got some more positions in FXI that we'll continue to manage and hopefully get off sometime soon. So hopefully you guys enjoyed this video. As always, if you have any comments or questions, please add them right below the video on the membership page. 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.