Profitable Earnings Trades In SCTY & TSLA

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Earnings trade: Today, we’re going to go over all the trades that we made for Thursday, November 6th, but I did want to give you guys a heads up that we did announce the next webinar that we'll be doing in 10 days from now, and it’s going to be on a new topic that we haven’t really covered a lot, but is actually something I’ve used extensively in trading with my ROTH IRA and my SEP IRA that I have, and that is covered calls.

If you’re going to be trading stock, (and most of us have stock anyway, we don’t just trade 100% options) then you need to be using covered calls correctly. We're going to talk a lot about using covered calls to supercharge the probability of success on your stock positions. And more specifically, what we’re going to cover are what is a good premium to be using, where do we want to select those strikes, how do you get into those covered calls, how do you adjust out of those covered calls, determining if you’re getting enough money.

And then also, if you don't want to actually trade the stock, we also want to show you how to synthetically take a stock position without having that whole stock investments, so the cost of doing 100 shares of stock, we want to show you how to do a synthetic stock position and then also throw a covered call on top of that.

It’s going to be a jam-packed session. As always, they limited seats, so there are only 27 seats left from when I already announced it the early bird. Those of you who are signed up for the webinar announcements, we’ve already had a couple of people signed up, and the seats are going to be limited, again, it’s Monday, November 17th, 8 PM Eastern, 5 PM Pacific.

Related "Earnings Trade" Resources:

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Now as members, you guys obviously have an opportunity here to upgrade to the premium membership and not only get that live webinar but all of the live webinars that we've done before in the past as part of an upgrade to premium membership. You’ll get all the live webinars for free, the strategy calls, the answer-of-all, and our live Q&A session which we just recorded and posted from last week.

We’ll have the next one coming up here in a couple of weeks. It’s just an open-ended Q&A for you guys to come on and jump on a call and ask me anything you want. I had a lot good questions the last time, and I’m sure we’ll keep building and building that. The premium membership is a bargain if you want to do that webinar.

If you want to pay the money to do the webinar, fine, go ahead, but you want to go ahead and upgrade to the premium membership because it's a bargain to get everything else that we've already done and all the recordings of all the past strategy calls and webinars, you get it all for one upgrade price. Go ahead and check that out. That's something that I want to push more of because I want to grow that premium membership base so that we have more and more people getting involved.

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Alright, as far as trades today, we had a pretty good day of trading. I think we had one new opening trade which is good in Qualcomm which we’ll go over. We had some very profitable trades that we started rolling off which is great, and then also one adjustment in CMG which I think is pretty important and we’ll cover that one a little bit more in depth.

The first trade I want to go over though is the closing of our earnings trade, and that’s in SolarCity. This is the first time we traded SolarCity. It ended up being a pretty good trade, so, of course, we’ll try to go after it again. But if you remember, we went ahead and sold the 60/46 strangle around SolarCity anticipating an enormous move.

The stock was pricing in a pretty big move for implied volatility, and we didn't get that big of a move, we got about a $3 move in the stock after it opened today, so we were able to close that out pretty quickly for a nice little profit. We did see a drop in implied volatility, but I think it’s got more room to go. But this is a one-day trade for earnings, and this is really what it intends to be. It ended up working out pretty nicely.

The other trade that we closed out of today is our call spread in Tesla. As we were nearing earnings for Tesla, we’ve had this call spread on for a couple of weeks now, and it’s made money, but it hasn’t made a lot of money. And we decided we’re going to roll the dice here. It's far enough away from the money, it’s out of the expected move for earnings in Tesla, so we’re just going to keep the one side of the trade on and hold it through earnings.

Well, it ended up working out pretty good because Tesla was up pre-market in the day and then by the time the stock opened, it quickly dipped lower below 230, and at that point, we were able to take our trade right off, very liquid security, buy back our short call spread. Our short call spread was all the way up here at 260, so we did have a lot of room, but we didn’t want to get into a situation where Tesla was going to rally on its earnings because they have excellent gains and they could've easily made a huge jump in one day.

But you'll notice that the bulk of the profit happened as soon as we saw that implied volatility drop. Even though we carried the trade for the better part of a month and a half here, we didn't see that drop in implied volatility. That’s why we didn’t see a huge profit start to materialize. We had maybe like a $20 or $30 profit. But as soon as we hit that earnings announcement and implied volatility dropped, then it started to realize a much bigger profit. It’s a nice little trade in Tesla.

The last trade that we closed out of today was our short VIX calls. At the height of the selloff in the market a couple of weeks ago, we continued to sell premium and volatility, anticipating that it would go down which it did. We went ahead and sold at that point some November 24/26 call spreads and went ahead and bought those back today for a $.5 debit. They can only go to zero, so it’s not worth holding them for another $15.

We've made the bulk of our profit here. It's the smarter trade to go ahead and close these out and take what you can get out of these positions right now. And when we had sold these positions, the VIX was at extremes, the VIX was up at 26 and 27, so we sold those right around the top of where the VIX is and knew that the VIX would come back down which it did. And it just goes to show you… And we’ve done this trade numerous times.

We’re very, very successful trading the VIX because it's so predictable that at some point volatility is going to come back down and you just have to be diligent enough to hold that trade long enough to see that happen. We’re still holding some other short positions in the VIX, and we’ll continue to keep those. They’re a little bit closer to where the VIX is trading now, but we should have a nice little profit start to materialize again before the end of November expiration.

Before we go over our Chipotle trade, I want to talk to you about our Qualcomm trade. This is fascinating. I’m glad we didn't trade Qualcomm for earnings because it blew the doors off of earnings, not in a right way. It was way outside of the expected move. It was one the biggest losers today as far as positions we watch on our watch list, so I’m glad we didn’t trade it. But that also gives us an opportunity to make now some money as Qualcomm starts to recover after earnings.

It was down big today, and we decided to go ahead and buy a calendar spread right around where Qualcomm was trading at the time which was right around 70. With these calendars, what we're doing is we’re selling that front month which is December, buying the back month which is January, and then the net difference between those is the debit we paid which is $.58.

Now, the whole idea here is that we're hoping that Qualcomm stays around and stays inside this 70 range. And you can see it had quite a big day as far as volatility. It was down to 67.67 today which is just an enormous one-day drop and then recovered almost all of that and is now sitting right at about 70.5. Our position is centered around this price. We ideally want it to just trade in this range. And Qualcomm has been a stock that can be range bound.

We have had numerous months where the stock has a $3 or $4 range. I like the odds of this trade. I like the history of Qualcomm being range bound here. I like this trade, but we’ll always keep it small. When we look at the actual profit loss diagram, this is what that calendar looks like. It peaks here right a 70 and then flattens out on either end. Our profit window is somewhere right around 73 to just under 67. That’s really where Qualcomm needs to trade.

We make the most money at 70; that’s the sweet spot, but anything between 67 and 73 is profitable. If we scale this chart up here just a little bit, that means that it can trade all the way down to 67 and it can trade all the way up to 73, and we still make our money. This is our profit window here.

It’s about a $6 range, and you can see that historically, that’s nothing for Qualcomm that's traded. When it makes moves, it trades in a pretty defined range. We like the trade here. I think it’s going to be a good calendar trade, but we’ll hold it out and see what happens. Alright, the last trade I want to go over is our adjustment in Chipotle. I think this is a fascinating adjustment.

We haven’t done one of these in a little while, but it’s something we’ve done many times before. We did one in Netflix that ended up working out well a couple of months ago, so this is another adjustment that we can do. We originally started with a calendar spread very, very similar to what we're doing here with Qualcomm above.

We originally started out with the 580 put calendar spread, again very similar to how Qualcomm looked, just on Chipotle. Now since then, Chipotle has continued to rally higher, and as we get closer to November expiration, we have to do something. We don’t want just to let the position go all the way to expiration and lose as much money as we can do. But we kept our position size small which is good, so we were able to make today's adjustment.

Now basically, what we did is used a vertical credit spread to facilitate the rolling of a 580 put up to 610. Don’t think too much into this. All we did was close out and buy back our profitable 580 put because as Chipotle rallied, we were short the 580 put and we went ahead and resold a closer put at 610. Now, the difference between that was a net credit of about $160.

That credit helps build the base to reduce our loss on Chipotle if it continues to stay higher, plus it moves in our potential profit window, so that if Chipotle does move down, we have an opportunity to make some money before expiration.

Here is what the analyze tab looks like for Chipotle. And this was our original position, so I want just to scale this out here, so you guys can see it. Chipotle is trading all the way out here, and our profit window is down here at 580. It hasn't been that favorable. It moved completely against us. But it’s way, way, way outside of our window, so what we’re going to do is we’re going to take this side of the graph, and we’re going to try to shift it this way.

We’re going to take this side of the graph and shift it this way, trying to get more credit which will help alleviate our loss on this side, bring up this side of the chart here and push this side higher. By doing that, what we did was buy back the 580 puts, so we went ahead and bought back the 580 puts, and then we resold the 610 puts for a higher credit taking in that difference. Here's the resulting profit loss diagram and you can see it’s a little bit different now.

We pushed this side down because Chipotle is less likely to go that way now, and now we’ve started to push this side of our profit loss diagram up, therefore reducing our loss, and if Chipotle does happen to make a move back down, we do have a beautiful little window that we can make some money on. The whole idea with this particular adjustment is that it's not an adjustment meant to create a profit.

We’re now in the defensive mode here with this trade, and we need to make adjustments that will help reduce our loss and still give us an opportunity to make a profit. And that’s what this adjustment in Chipotle is about. Hopefully, that was helpful to go over that. A small trade, but it’s a very important trade as they all are to make sure that we continue to babysit them and make adjustments.

As always, if you guys have any comments or questions, please ask them right below. I’ll get back to all of those tonight or tomorrow before the open. And if you're watching this video somewhere else online or on YouTube, you just have to understand that you're getting this video and seeing all of these alerts about 15 days after they're sent out to our members. What that means is that you're not getting all of this stuff live-time, but you could be if you sign up for a free trial at optionalpha.com. 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.