How to Trade BABA’s Earnings With Options?

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Earnings options trades: In tonight's video, we're going to be going all the trades that we've made for Tuesday, August 11th. Fairly quiet day. We have one quick adjustment trade that we made in FXI earlier this morning. And then two earnings trades, kind of earnings are trying to ... or starting to wind down here at the end of this week.

But still, we're able to get in what I think are pretty good trades to round us out here. For FXI, let's cover this one first. We did make a very similar type of adjustment to FXI that we also made to FXE and FXC as well over the past week or so. Rolling down our call side which is practically worthless at this point from the 45 strike down to 41 strikes.

So again, we had a big iron butterfly in FXE. The 45 calls that were short are now well above the mark that FXI that was trading around 41. So these 45 calls that we had shorted before are practically worthless. I think they're worth maybe 5 cents or so. They're very very small values. There's no point in holding these to get 5 dollars between now and expiration. 

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We're rolling those closer to where the stock is trading now down to the 41 strikes, and that gets us an overall credit of about 63 cents. That helps also widen out the break even points on the trade, helps reduce a little bit of the risk that we have.

You can see this is where FXI is now; our 45 strikes were all the way up here. The stock has continued to move lower, so now we're moving those down closer to where the stock is trading right now and taking in a bigger credit.

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When we look at the profit loss diagram, and again this does not factor in all the old trades that we've closed out of, our new profit and loss diagram looks something like this. It's a little more centered than it was before. Our old one that had pre-adjustment was a little bit more like this, this dotted line here.

It was a little bit off; it was not as neutral and balanced as we have it now. Not to say that we're 100% neutral in FXI at this moment, but we're getting there with these adjustments. We're starting to make slower and slower adjustments that quickly get us there. And again, the whole idea here is just to continue to roll down trades for our credit.

We do have now ..., and you can see in our position tab inside the trade tab here, you can see that we're now short the 41 calls and we're also still short the 42 calls. We don't have anything out at 45; we don't have anything out at 46. This has been what we're doing.

We're moving down the further out options that are worth 4 or 5 dollars a piece, and we're moving them down and exchanging them for options that are worth 80 to 40 dollars a piece, depending on where you're looking at. Try and be a little bit more aggressive, taking a little bit more premium, increase the value of the overall trade for the end.

Hopefully, we get a nice little bump up in FXI potentially here in the next day or so. As far as earnings trades go, the first one that we got into is FOSL. Did a nice wide strangle on FOSL, and pliability was really good, liquidity was really good. We had an opportunity to sell options for the money.

The 70 call and the 55 PUT down below the market, and that gave us an overall credit of a dollar sixty-seven. Remember that credit that we take in moves our break even point out by a dollar sixty-seven on either end beyond the 70 call and below the 55 and a half PUT.

For FSOL, the market was expecting the stock to make about a 5 and 3 quarters move, call it about 6 dollar move. Well after hours the stock is now trading since they did announce earnings, down around 58. So closed around 62, it's now trading down around 58.

Again our position here ... and you can see there's a lot of people who also traded this today, a lot of volumes, a lot of open interest on the 55 strikes ... should be more than safe. It looks like we should capture pretty much all of the premia that we laid out here for FOSL for tomorrow.

For BABA ... and let me just go to the pricing here ... for BABA it was pretty much the same thing. They announce tomorrow before the market opens, so we're not going to get anything tonight. But, the market was expecting the stock to make a 5 dollar move on either end.

The stock closed around 77; we want to make that were a little bit outside of that range. So we sold options as you can see up here around 83 on the call side, and down below we sold options around 70 below the market. We moved a couple of dollars beyond the expected move in either direction just to give ourselves a little bit more of a cushion than what move people have.

Again, that's because we just know that BABA might be a pretty big mover. With BABA we took in a nice big credit of about a dollar thirty. Again, they announce tomorrow before the market opens, so we don't know where it's going to be pre-market.

Hopefully, it should turn out to work in our favor. If it doesn't, we'll obviously update everyone along the way with any adjustments that we do have in these trades. As always if you guys have any questions, please let me know. Add them in the comments 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.