This Option Trade Adjustment Saved Me $200

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Option trade adjustments: In tonight's video, we're going to go through all of the openings, closing, and adjusting trades for August 18th. We had a busy day. A lot of closing trades as we get closer to expiration. Also, some new trades that we put on. A couple of earnings trades just to round out the week here.

Let's start tonight by looking at Yelp. I know it's the bottom of the list. We're going a little bit out of order, but it's okay. We'll get to all the trades, don't worry. In the case of Yelp, Pandora, and BIDU, these are trades that we had adjusted post earnings.

I've been holding onto these trades, hoping that some of them would be come back around and we can make, max some of the money on our potential hedges. Now in the case of Yelp, we ended up reducing the loss by about $200 from what the original position would've been and ended up with a loss of 283 after all adjustments.

Again, that's down about $200 from where it could've potentially been because of the adjustment technique and strategy that we used to move the position from the weeklies out to the monthly contracts. Trying to take in as much credit as humanly possible. I want to get through that tonight.

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Again, we bought back our strangle in Yelp for 865 debit. Again, that made our loss overall after adjustments 283 down, about $200. When we look actually at Yelp and where the stock is trading right now, you can see that the stock obviously had a huge move after earnings. This was the initial position that really hurt us.

The stock basically went from around 35 or 33 in change, down to around 24 or 75 or so, the first day after earnings. Since then the stock has moved up and back into the range, almost about $2 higher from yesterday when the stock actually moved back up from where it had actually opened lower. It had recovered about $2 of that potential loss after earnings.

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During that time period, we obviously saw implied volatility drop, that really helped. Having the stock move back inside that range, giving us a little bit more time as we rolled the position from the weeklies out to these monthly expiration contracts, which are right here, gave us an opportunity to make back some of our potential loss that we had might or might've incurred if we just have closed out the original position after the announcement of the earnings.

When we actually look at our account statement and everything that happened in Yelp, you can see here this was the original position that we had. The straddle back on 7, 28. It's almost been a month that we've been holding this position after adjustment.

Took in a nice $475 credit on that initial position and then systematically rolled the position out to the August contracts with the next opening orders to roll out the 33 1/2 puts and the 25 calls. You can see, added a nice credit of about $107 to the overall credit of 475.

That really helped out when it came time to buy back the position for 865. We had a lot of decay in the value of those. That really helped and how to reduce that potential loss. Have we done nothing and just close out the position right after earnings, we would of suffered a loss that was $200 plus higher than where it was at the time.

That really didn't help us to basically do nothing. Adjusting made the most sense in this case. In most cases it does make sense that even if it doesn't work out. The 2 other trades that I want to go through real quick are BIDU and P which is Pandora.

In BIDU, we bought back just our in the money put spread side, which was borrow the money and we knew that we were going to have to buy this back. A 493 debit, 288 loss after all adjustments. We were able to cut down the loss in BIDU by about $50. That was after our initial roll out into the next contract month.

BIDU is the case where we actually didn't see the move back inside the expected range that we saw with Yelp. You see the stock opened up much lower. Had a very slight move inside that range but no where near where we wanted it to be since it just pulled away. We positioned ourselves well enough in this case of BIDU that we didn't get hurt in case the stock continued to fall.

That was really the culmination of the original earnings trade and rolling that out into the next month. Creating a butterfly spread. We really wouldn't get hurt wherever BIDU landed. We're just rolling the dice and saying, "Hey, let's give ourselves more time. See if it lands in a very tight range.

If it doesn't, we'll still take the reduction in credit by rolling." That's what we did. It did work in our safe favor in BIDU but rolling the trade into the next month actually ended up saving us a little bit of money because we took in a credit on the roll. In the case of Pandora, this is actually the only earning straight adjustment that's gone completely against us.

Sometimes you're going to have these. After Pandora and all the adjustments that we made in this stock where we rolled up a couple of spreads a couple times, we ended up buying back our strangle in Pandora today for 520 debit and 266 loss after all adjustments. Actually, it's much higher than it could've been if Pandora hadn't gone on just a really crazy upward swing.

You can see Pandora stock has just been on a non-stop terror since earnings. Basically moves completely against us, never once moved in a favorable direction for us. Even after we made some adjustments, we were still able to keep the loss to a minimum because we were trading small contracts, small position sizes.

Overall, even though Pandora was our worst adjustment for earning season and again it's just luck and probability. Our overall portfolio for making adjustments around earnings got us back a couple $100 of potential lost money that we have now recouped or regained for making these adjustments.

Overall our strategy for making adjustments does work and it has been really profitable for this earning season. We were able to buy back our one loan earning straight from yesterday. URBN, which is Urban Outfitters for a nice debit of 135. Taking a nice quick profit of $187.

The store here in URBN is really nothing. The stock basically opened exactly where the market was trading yesterday. A couple dollars lower. Implied volatility ran from almost 100 down to the 22nd percentile. If this doesn't describe how powerful implied volatility is, the stock didn't move.

Implied volatility dropped from 100 to 20 and the value of those options basically collapsed. This really proves that concept that implied volatility has a lot to do with option pricing. You should really be concerned about when you start entering trades and placing different strategies in the market.

Now, before we get into our new earning trades, I want to get into the rule of FCX. We did do a nice big wide roll of FCX from our August position out to September. We covered this in detail with our lead members last night on the weekly strategy column. Basically what we said, with FCX we wanted to maintain the position and we could do it to the credit of the next contract month.

We went into a lot more detail on that call, which I'm not going to get into here. Suffice to say that we did roll from the August 10 calls out to the September ... I'm sorry August 1/2 calls out to the September 10 calls. The reason that we did make one slight adjustment to the strategy is because out of September, the current strike prices do not allow for us to move to that same strike price level of 10 1/2.

We did have to come in just a little bit to 10 to give ourselves an opportunity to roll the entire trade. On the put side, we were able to roll the 13 August puts out to the 13 September puts. That wasn't an issue at all. We were able to stay at the same level. Again, overall on the entire roll, we took in an extra $76 in credit.

This adds to the additional credit that we already have building in September from one other position that we had stacked on top. The reason why we like rolling this thing out again is because the stock really hasn't moved too far outside of our expected range.

Implied volatility still really high, that means rolling out into the next contract month makes sense to establish a new position. Implied volatility remains high. That doesn't change. If implied volatility was lower, we would not roll this trade out to the next month because there's no point in doing so when implied volatility is dropped.

You're not gaining any value from doing that and likely wouldn't gain any premium from doing that as well. Again, as you can see here with FCX. With the August positions, you can see that you have all of these half strikes available. You can do 8 1/2, 9 1/2 and 10 1/2.

When you rolled out to the September options, you really were pretty limited in your strike selection to just the dollar strikes. We couldn't roll out to the 9 1/2 strike or the 10 1/2 strike. We had to pick and choose our entry points here and had to choose the 10 strikes when rolling the 10 1/2 puts or the 10 1/2 calls from August.

We look at our overall position in FCX in September, it looks still pretty good. I'm still very excited about our overall position in FCX. You can see as I adjust for the next contract month that we have a nice wide strangle straddle going here in FCX right over where the market is trade. Our entire position is now pretty centered exactly on about $10 for FCX in September.

Even though, August really didn't work in our favor, by rolling it out in September we re-centered our entire strategy. We gave ourselves much more room for the stock to move. It moved down to about 8 and a quarter in 1/2 and up to $13 before we actually lose money next month.

Hopefully, we should get a nice drop in implied volatility in rolling this position might make the best sense. We'll obviously recap that once we close out of everything. As far as new earnings trades go today, we did 2 new straddles. They were probably the best trades that we could possibly do in the current market right now. TGT and AEO both have really great implied volatility, very liquid markets.

It gave us an opportunity to do something a little bit more aggressive. Both stocks were pretty low, under $100, which is always a requirement of ours for doing an earning straddle just to do reduce the margin requirement. On TGT, we sold the 79 1/2 calls and the 79 1/2 puts. Right where the stock was trading.

Took in a nice big credit of $2.74. Again, as you look at the stock chart of TGT, you can see that implied volatility has been pretty high. It's up in the 65th percentile. It's definitely a stock that peaks in high implied volatility around the earning cycle and has a nice little drop. Going back historically, it's not a big mover or, hopefully it, won't be a big mover around earnings.

We're hoping that it doesn't have a huge move around earnings. When we actually made the trade today in TGT, that was basically right where the stock quote was added at that time. You can see it's already headed up to around 83 1/2. I think after hours it's trading just a little bit higher.

We did try and center the trade as much as we possibly could around that 79 1/2 strike. Again, exactly where the stock was trading when we made the trade today. When you look at after hours, right now you can see the stocks already more just a little bit after announcing earnings.

It's still within the expected range, trading right now at 81, 25. Our break even is just a little bit beyond 82. It should end up being a really nice profitable trait. With AEO, we were able to sell the 18 call and the 18 put for a $1.65 credit. Again, that $1.65 credit got outside the expected move.

The stock closed a little bit higher today at 18, 27. You can see implied volatility up in the 70th percentile, much higher. Really warrants that straddle type trade. With AEO, the expected move on the stock was a little around $1.45 or so. Taking a $1.65 credit gave us really good opportunity to take in some premium here. We'll see what happens tomorrow when they announce earnings.

It should end up being a nice profitable trait. At least it's positioned to be that by taking a nice premium and having implied volatility on our side. As always, hope you guys enjoy this video. I know it was a little bit longer going over all the recaps and trades we've had.

If you have any questions at all, please let me know by asking them in the comment 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.