Large Iron Condor Position In Panera Bread Stock

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Iron condor: In tonight's video, we're going to go over all the trades that we made on Tuesday, October 27th. The first two trades that we're going to talk about are our closing trades in Coach and BABA. I get a lot of emails from people, sometimes they get our alerts and then they can't enter the trades until later on in the morning because of their job or whatever.

In this case, it worked to your advantage because of both of these trades, although I always suggest that we enter, or exit these earnings trades right after the market opens, minimize the directional impact and just try to trade the volatility. Although both of these trades opened up at the higher end, both of them came back in today and would have ended up being a little bit bigger winners in both cases. 

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In the case of Coach, we ended up closing it out early in the morning at a $13 loss and BABA with the $45 profit, basically a push on both of these trades. You can see, here's Coach, got that drop in implied volatility stock moved less than expected but rallied early in the day and then came all the way back around.

Almost the same thing happened with BABA. The stock opened at the higher end of its range, came down towards the end of the day, couple dollars, but we did get that drop in implied volatility that we were looking for. Again, in both of those cases, a little bit of a push trade, didn't make any, didn't lose any.

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New trades we entered today, we had a strangle around AKAM, A K A M. We sold the 82 calls and the 67 puts for $1.30 credit. After hours, AKAM is trading much, much, much lower. Again, we sold the puts ... I'm sorry. We sold the 82 calls and the 67 puts. Again, so the 67 puts are about down here. The 82 calls are kind of off the chart.

This was our big, wide profit range. Again, 99% implied volatility high, but we didn't do the straddle because we could get pretty good pricing selling options far out. We took in a pretty decent credit, even selling options far out. We didn't need to do the straddle. In this case, doing the strangle is going to be a little bit more beneficial just from where the stock is trading after hours.

Here's a look at our payoff diagram. Again, stock right now after hours is trading at about 65 or so. Our break even is just below 66, so we're just about a dollar off, everything, all things considered, if the stock opens here tomorrow, we stand to lose about 75 bucks. Not a huge loss and, obviously, we can look to adjust this trade and carry it into the next month if we want to.

With this particular stock, it's got pretty good liquidity. It doesn't have amazing liquidity, but it's not a huge mover except for earnings, so this might be a case where we look to get into this trade and maybe carry it through to the next month. Again, review those videos that we have on rolling these earnings trades.

The other big position that we had, and I put out a disclosure in the email; this is a fairly large position. It's about $1000 margin requirement position, so it's definitely for the larger accounts that are with us in our membership. If you've got a small account, as I mentioned in the email, this is probably not the trade for you just because of the position size.

I like the setup here in Pandora. The pricing was pretty good. We sold a huge iron butterfly. The 80/185/210 call spread and then the 185/60 put spread. Now you notice we took in a massive credit of almost $14. That $14 credit that we took into was almost equal to the exact expected ... I'm sorry. It was a little bit more than the expected move that Panera Bread had for earnings, so expected move was about $13.80.

We took in a big massive credit of about $14.15, so that gave us a huge opportunity to get our break even point outside of that expected move and take in a huge credit at the same time.

After hours right now, the stock is trading just slightly higher, which is okay. If this thing continues to stay right here and not have such a big move that I guess the markets anticipated, we should have a decent profit here on Panera on our hands.

The only thing that's going to be a little bit different is that we're not going to see the quick decay all the way down to zero with these options because we went with the November options. There weren't any weeklies that were available for Panera.

You can see on the option chain here the only options that are available are the monthly contracts, so we had to go with the monthly contracts just because there are no weeklies available, and you can still do that with the front most contracts.

They still have all the volatility juice and everything in them, but in the case of Panera, I like the setup, implied volatility at the 100th percentile, so this is when you want to be a little bit more aggressive, take that bigger position size because statistically, it's going to play out for you longer term. It may not play out in this case.

In our case, it might play out well for us, but statistically, it's going to play out for us long term to work to our advantage, in our favor. Another straddle that we did was on Twitter, we sold the 31.5 call, and the 31.5 put. Took in a pretty nice big credit on Twitter. The 410 as far as a total credit on Twitter. I like Twitter as well because it's a lower price security, it's down in the 30s.

That means that margin's easy to carry for this thing and implied volatility is in the 88th percentile, so naturally, you go with the little bit more aggressive strategy doing the straddle or the iron butterfly. You take in as big of credit as you can take in. After hours, Twitter has moved a little bit lower.

The stock's trading right near our break even point, so we'll have to see where this thing goes tomorrow, but it pretty much made the edge of the expected move. This is a trade that we might carry over for the next month if we don't have an immediate profit early in the morning. We'll just have to wait and see.

Sometimes these things will move dramatically later on this evening and throughout the next morning here. Right now it's just on edge. Then the last trade that we did is another iron butterfly in CROX. Again, we had to go with the November options in CROX because they don't have weeklies.

We did the 10/13 call spread, and the 10/7 put spread for $1.10 credit. What's really interesting about CROX is that we could have easily in this stock ... It's a lower priced stock, down around $10 or so, implied volatility in the 85th percentile. We could have easily done the straddle in this case.

Given the fact that this stock has had a huge, huge move lower in the last month and a half and continued to move lower, it's down about 6% today alone, when you actually look at the option pricing tab what you'll notice is that buying protection on either end, again, turning this strategy in from a straddle where we would just sell naked the 10 calls and 10 puts, buying protection on either end was very cheap, $2 on this end, and $2 on this end.

To give up a little bit of your break even point on either end, about 5 bucks overall on the entire trade was probably the best idea because we could buy cheap protection.
What this does is this just protects us against a dramatic move in either direction.

After hours, the stock is trading a little bit higher and who knows where it's going to be after it goes through earnings and starts to get some liquidity back in the stock for today, but I think buying protection in this case, and I wanted to show you guys this, is that even though it's a low price stock, we would naturally go with the straddle, buying protection was 5 bucks together on either end, it just made sense to spend a little bit of money to add some protection.

The last thing I want to cover is a trade that we didn't make but I wanted to talk about is in Walgreens. This was on our radar today, but you'll notice that today a huge move up in Walgreens. They announced that they might be in talks to buy Rite-Aid, and so both of these stocks were up big today.

Now, if you had traded this stock before earnings, the day before, a couple of days before, anticipating this earnings event, you would have obviously put yourself at a really big directional disadvantage because you're trying to trade non-directional and the stock makes a big move.

That's one point as to why we don't like to trade these things up until the last day of earnings because we can see all the activity and be as neutral as possible for the actual earnings event when that happens. The second thing I want to talk about is that we don't always want to trade these types of events because Walgreens has earnings and they're announcing possibly a merger acquisition.

This stock's going to be all over the place in the next couple of days, and it might not necessarily be necessarily rational with where they are with earnings. It's got a lot of hype and juice into it just around this merger and acquisition type talk. In this case, I decided just to skip this type of trade.

We don't want to be involved in something like this where there's this outside influence of mergers and acquisition talk that's going to drive the stock dramatically higher or dramatically lower over the next couple days. We definitely might not see that drop in implied volatility as a result of all this continued hype and discussion about an acquisition.

Just wanted to cover that real quick. I know that probably some of you have wondered why I didn't make a trade today in Walgreens. All right, so as always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below. 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.