2 Easy to Follow Short Option Trade Examples

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Option trade: In tonight's video, we're going to go over the two new earnings trades that we had today in GPS and WSM. Just a heads up, now that we're past the bulk of earning season, we don't send out any more of the earnings blotch just because we're not going to be doing a lot of earnings trades.

So these two trades we just happened to get filled at pretty good prices and both of them actually should end up working out based off of where the stocks moved after hours. But right now we're not going to be sending out any more earnings alert watch lists. That's usually during kind of the bulk of the earnings season.

So, I know I got a lot of emails from people. We didn't send one out today; we didn't skip doing it, we're just past kind of the bulk of the earning season to go ahead and send that out. So let's start with WSM as our new trade that we entered here today. 

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This is a trade that we did where we did a very tight strangle around the market. Now, the reason we did the strangle was that the stock was trading right about 66 and some change. So, you'll notice it didn't have strike prices at 66. There weren't dollar-wide strikes in WSM. So, what we decided to do is we sold the 67.5 call which was right above the market, and then we also sold the 65 put which was right below the market.

And again, this gives us a little bit of a neutral bias towards where the stock is moving as much as possible. We took in a massive credit on this trade of $475. That's mainly because implied volatility's in the 92nd percentile.

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And again, this is just an earnings trade. It's a one day trade. Now as the comments will show ... because they aren't just loaded by the time I did this video ... Again, if you have a risk-defined type of portfolio or if you're in an IRA, what you're going to want to do is you're going to want to buy some call options on the market and buy some put options on the market and create an Iron Condor.

And I'll show you how to do that here in a second. Here's a look at WSM after hours. This is an inter-day chart. The stock closed a little bit above 66 and some change. Right now it's trading about 63 67, kind of after hours around 64 or so. So it ends up working out pretty well. Our very tight strangle...

Almost a straddle over WSM right now is going to work out pretty well. Stock's trading right here about 63 and some change, and again our break-even point is all the way out here around 60.25 or so. So we still have a lot of room between ourselves and the market, not that that can't be close at some point tomorrow in the open if the stock continues to lower in after-hours trading.

But generally, it looks like things are going to work out for this trade so we could take this trade off at a nice profit tomorrow. Again if you have that risk-defined type trade in WSM not WFM ... If you have that risk-defined type trade, you'll notice that we did just the 65s and then the 67s. So if you wanted to define your risk, you might have gone out to the 55s, and you bought those put options.

They're cheap, $7 a piece, but they give you some protection. And the same thing on the top side. Maybe you went out to the 75 strikes or maybe out to the 80 strikes, and both of those are fairly cheap depending on how much protection you want to give yourself.

Again, you're going to use up some of that credit you took in... that $450 plus credit ... you're going to use some of that to buy these options that are cheap on either end. But that allows you to do this trade in any account with any broker because it's defined risk. And again, that's the key with all these brokers if you don't have the proper trading approval levels having defined risk.

All right, so the other trade that we made today was in GPS which is GAP. Went ahead and did the straddle right over the market, so nothing crazy here, just did the 25 put and the 25 call ... Took in a nice good credit of about $142 ... Implied volatility in the 88th percentile, so really good trade here. I like this trade in GAP as well.

So here's GPS after closing, and you can see the stock ... Although it had a huge initial move down to around 23, stock mainly kind of settled around 24.80 or so after hours. So, again, with our position mainly around the 25 strike ... GPS ... Mainly around the 25 strike, this is going to work out well for us.

So if this stock can kind of settle anywhere in the 24 and up the region, around 25, that's the maximum potential profit. And I don't know if we'll get all of that tomorrow. We'll look to close this thing out pretty early in the morning as we do with most of our earnings trades. But right now it looks like it could be, again, a nice trade.

Same thing with GPS as with the other trade in WSM. If you wanted to create a risk-defined position, because we just have the short straddle here at 25, you're just going to go out a couple of strikes, maybe three strikes out and you're going to buy the 23 puts. And those are about $12. Or you go out three or four strikes out on the top side...

Maybe by the 27 calls ... And you're going to go ahead and buy those for $13 as well. So, you're going to take a little bit of money out of your total credit ... In this case going two strikes out ... You take out about 30 dollars from your total credit, so instead of having a credit of $142 you now end up with a credit of about $112.

But now you have a risk-defined position. So, this is that give and take that all positions have in the market. Where if you define your risk and you have "a little bit less risk or limited risk" it's going to suffer a little bit in your overall credit. Not that you're not going to be profitable, you just won't take in as much money as maybe we have with a straddle or a strangle.

But again the reason we do this is that as we know through our portfolio section and the podcast, we just released today that kind of goes over all of our strategy, performance, and historical stats ... These types of trades ... These straddles and strangles our highest win rate and our biggest profit makers.

So that's why we're doing more of these, and that's why we're being a little bit more aggressive in how we're doing this. As always, hope you guys enjoy these videos. If you have any comments or questions, please let me know. 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.