SCTY Earnings Strangle For $100 Credit

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Earnings strangle: Tonight, we’re going to go over all of the trades like all two trades that we had. But we are going to cover the two trades that we had for today which is Wednesday, November 5th. Fairly active day I would say, as far as orders go. I had I think 8 or 9 orders working and only two fills.

It is what it is. We had some adjustments and rolls we were trying to get in, but just didn’t get filled on them. A lot of activity, just not a lot of results as far as trades, but that's okay, that’s sometimes what happens.

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earnings strangle

The first trade I want to go over tonight real quick is the closing trade in COF which is Capital One Financial. For those of you who are on the alerts and members, you saw in the comments are trade remarks that I’ve had this working order for about three days now at about $.15 to $.18. And the market’s been there the whole time.

It's been trading there, the pricing of the options has been there, but it just hadn’t been filled. And I think it’s just worth mentioning tonight because it's important to understand that sometimes you got to wait for your price. You can’t chase the market higher. I could’ve easily put in a bid for 20 or something like that and $.20 and gotten out, but it’s $3 or whatever it is, but it’s been there all week and just really hasn’t filled. There’s not been a lot of activity in these strikes for November.

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We finally did get out of that trade tonight, took a nice little $50 profit on it. Again, it was an earnings trade from COF, earnings a couple of weeks ago, and we just ended up trading the November options versus the weeklies, and it worked out for us nice. If we go to the chart here of COF… And let me just bring up the implied volatility. You can see that we did have a very, very nice drop in IV, following the earnings event which is what we wanted. We wanted this decline in IV.

And even though the stock went completely against one side of our position, it had decayed in value pretty much because of this drop in implied volatility over the last couple of weeks. It goes to show you that even though the stock can move completely against you with options, you trade the right strategy and wait and be patient with the trade, it’ll end up being an excellent little winner in the long run. That’s a very good trade in Capital One, small, but good profit.

The other trade that we got into today is in SolarCity. This is the first time that we’re trading this very liquid, a lot of buzz about this particular stock in earnings. We decided to go ahead and sell just one lot strangle in SCTY, and we did choose to do the weeklies which are the Nov ones. If you have trouble understanding or want to know a little bit more about how weekly options are tagged in the system and your broker platform, we did a take five video segment just a couple of days ago, talking about all of the different types of weekly options and how they’re tagged.

In this case, it’s the November 1 which is the first week of November. This is when they expire. They expire Friday of this week and they’re the weekly options. We went ahead and did the 60 call and the 46 put out of the money for a total credit of $1 which I think was a pretty decent credit. I would’ve liked to get a little bit more, but it was a pretty liquid market as far as we’re concerned.

Here's the setup with SolarCity. The stock has been pretty much in a nice little decline since the end of September expiration and implied volatility has come off of its highs, but that doesn't mean that it can’t go lower once we see earnings. We saw this a couple of times with SolarCity where implied volatility has dropped after earnings, so we’re hoping that we get that same type of movement in IV right after the earnings event which I believe they did announce later on this evening, but I’m not sure about that. It hasn’t published in the system.

But it's been on a nice little uptick since then. And today was a wild day. It was down to near 50 and then it was back up to around 58 and settled around 54, so a pretty big swing which goes to tell you that we could see a nice little move one way or the other after earnings. But implied volatility is superb, and then trade liquidity is also very, very good for SolarCity.

This is our position right here in the weeklies and you can see that the markets are pretty wide. They’ve got a lot of strikes that have a lot of activity, not only in the volume but also pretty decent open interest. I’m pretty sure that a lot of this volume that we see here today is not reflected in open interest until tomorrow because open interest is a lagging indicator by one day, so we don't get to see these figures until tomorrow. But judging by just how much volume is on both sides of the market, I think it's pretty liquid. I like the liquidity in the trade.

And what we ended up doing was going out to about the 15% probability on either end, so just over a one standard deviation move on either end. Right now, at the end of the day, our put side came down to around a 13% probability and our call side went out to around 18%. But at the time of this trade when we got into both sides, we did get to both sides around a 15% probability, so that leaves us with a 70% chance of success on the trade.

Now, what’s fascinating is that the expected move is a little over $5.25. That’s what the market is pricing in as possibly a move here after earnings for Solar City. With our strikes, we’re well beyond that on both ends. I think that’s a good trade because we’re definitely outside of the expected move range and we’re a little bit more outside the expected move range than most people I think who are probably trading today.

It seems like a lot of people were trading right around 57, 50 or so and making it a $4 or $3 move on either end. If we go to the Analyze tab, I do believe that they did announce earnings because I see… And I just hadn’t seen the news article yet, but the stock is trading down to 53 ½ right now. If that is really what’s the case, then this ends up being a very, very nice trade for earnings and a nice little one lot should make a very decent profit tomorrow in the open.

But that's pretty much it. Very quiet day as far as trades which is sometimes nice, but I'm sure we'll have other days where we have lots more trades to talk about. As always, if you guys have any comments or questions about these trades or any of the other trades that we make, please ask them right below in the comment section.

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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.