Profitable TWTR Earnings Trade

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Earnings trade: In tonight's video, we're gonna go through all the trades that we had for Wednesday, July 29th. Actually, before we go through the trades that we have today, whether opening, closing, adjusting trades, I want to talk through SNDK, which is SanDisk, and their potential dividend assignment.

So, SNDK. So what happens is that now SanDisk is going to go ex-dividend tomorrow, so they are gonna basically go through the process of paying out dividends. Anybody who wants to be part of that dividend payment has to have exercised their option either today or overnight.

And so the question becomes, because we have a deep in-the-money call that we are short – we're short the 54 calls all the way down here, and obviously the stock trading higher – the question becomes, does somebody exercise that call option in order to buy the stock and therefore get paid the dividend.

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Right? Because the whole idea is that as a short option seller, we're at risk that some option buyer is going to exercise their contract in order to collect on this dividend payment that's coming up. Okay? So the one thing I want to do is I want to go through the process like I had said in the e-mail about why we want to look more importantly at the corresponding put option.

And this has even become a little bit more clear over the past year or so for me, as I started looking at extrinsic value versus intrinsic value. You can still look at it that way, but it's more accurate to look at the corresponding put option and think through the process in the terms that we're going to describe here.

So this is a really important one, I encourage you to pay attention here to this little segment because it saves a lot of time and hopefully will answer the bombardment of questions that I had today regarding this. Okay, so the first thing we're going to do is we're going to put ourselves in the position of someone who is long the 54 call.

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Okay? So this is just a simulated trade on our platform here, and all we're looking at is just this profit-loss diagram. Now it doesn't matter where they got the long call because they're going to exercise it or they're not. And so that's all that matters at this point, is just this basic profit-loss diagram for a single long call option at 54. Now what's important is that you have to put yourself in the mind of the call buyer.

Right? If they're going to exercise and take advantage of the dividend, what they might want to do is try to get themselves back to the exact position that they currently have right now. Which means that they have almost no risk below 54, so they have no risk below 54, and they maintain the entire upside potential of the stock. Okay? So if they want to go through this entire process and collect the dividend, it's gotta be valuable enough for them to get back to the same profit-loss diagram with less money out of pocket going through the process. Okay?

So one of the ways that they could do it – and let me just add this simulated trade – is they would be long 100 shares of stock, so if they were to exercise their option and buy shares at 54, they'd be long 100 shares of stock at 54. Okay? So for one option. Now, the dividend that they would get paid is 30 cents. So with that 30 cent dividend, they would want to use some of that premium to go out and buy protection down at the 54 level. Because again, they want to get back to square one: the same profit-loss diagram that they had before.

And so what they're going to do is they're to buy protection down at the 54 strike here, and they're going to try to buy that for something around 29 cents or so. So you can see right now that it's just a little bit lower cost to be able to do that. So let's just add that contract here. It's a dollar higher on the asking price to do that. So you can see that the cost to do that is $31 in our case right now. But now this gets them back to the same profit-loss diagram that they had before.

And so again, it doesn't matter about the break-even points and all that, all we care about is that it has the same type of shape, right? So they're long 100 shares of stock at 54 and below that they've bought a one put option, which gives them protection. Okay? Now the key here is that if they went through this entire process as it stands right now – and this is so marginal, on the edge – if they went through this entire process right now, they exercised and bought the stock at $54, again they would get paid the dividend which is 30 cents, okay?

So they'd have 30 cents to work with. But to get them to square one and to replicate the same profit-loss diagram that they have right now, it would cost them $31, on the actual market at the end of the day, to buy that put option and hold it overnight. So the reality is that it would cost them a dollar to do the assignment, collect the dividend, and get back to square one.

And so this is why sometimes what we have to do is we have to take our in-the-money strike, which is the 54 calls, we have to look over across to the corresponding put options and see what they're trading at. Now, this is close. I mean, it's a half of a nickel below what it intrinsically should be worth, which is 30 cents. If it's anything below the value of the dividend, then we're all good.

Right? We know that we don't have to worry about it. If it's anything above that, then that's where we have to be a little bit concerned that we could be in a position where we have to be exercised or assigned. Okay? Now the reality is you can check out show 18 on our podcast. We talk through the entire process. Even if you don't have the funds to carry the margin that is gonna be coming up with that exercise – and looks, we're gonna run the risk of having the option exercise; I said that in the e-mail today.

We're gonna run that risk of having the option exercise, and even if you don't have the funds to do that, your broker will still allow you to sell the shares back or buy them back. So it's not going to be a big deal if you do go through the exercise process and you get this huge drawdown in your account because you have all this short stock now, you can go back through and buy it and cancel out the trade.

The brokers know that that's something you would do that same day. But I encourage you, check out show #18, I believe, of our podcast. We go through the entire process. Alright, so getting into today's trades. Real quick, we had a nice little profit in Twitter. Closed that out at a nice profit right after the market opened. Twitter opened inside the expected range, which was nice.

X, which is U.S. Steel, opened slightly higher and I'm glad we closed it out early in the morning. Closing it out early in the morning did give us just a tiny profit, basically a scratch after all the commissions and everything. But had you waited a little bit longer with U.S. Steel, you would have seen that profit disappear and it would have become a total big fat loss. So in this case, exiting early in the morning, not waiting a couple of minutes, even an hour after the market opened, would have saved you a ton of money, even though implied volatility started to go down.

The other trade that we had today was Yelp. This was the one that moved against us for sure. So we went through the same mechanics that we did before in the last couple videos, so you can check out those to reference them. I'm not going to spend too much time on it because it's the same mechanics that we went through before on a couple of other trades.

All we did is we went through and rolled out our put option – the 33.5 short put, we rolled that from the weeklies out to the July monthlies – and then we came back in, and we sold a call option that's a little bit closer to where Yelp was trading at the time, which is 25, and we sold that for $1.10. So even though we paid a $3 debit to roll out our put side, we ended up with $1.10 credit on the additional call, so it does give us an overall credit of about $1.07 on the entire trade.

And look, Yelp moved outside the expected range, so that's definitely what it did, but it's already starting to rally back higher. Implied volatility dropped, that's what we were looking for. Now, all we want to see is Yelp trade in between our short strikes, which is in between 25 and 33.5. And you can see right now that that is very much where ... Hold on one second ...

That is exactly where the stock is trading right now. So it did rally back up just a little bit today, closed at 25.05. All we need to see is we need to see Yelp trade in between 25 and 33.5. That would give us a good opportunity to reduce practically all of the risk in this trade after rolling it out to the next contract month. Alright, so opening trades today. We had one nice little opening trade in EWW.

This is a trade that I tried to get into earlier this week and just couldn't get filled. I wanted a particular price that we were going after based on the risk in the trade, and we finally were able to fill five contracts, the 58/59 call spread above the market, meaning we're selling options above where the current price of the stock is. And we did that for a $19 credit. Now what's cool about this is that with EWW, it has high implied volatility right now, so it's finally popped above this 50th percentile.

And you can see, it's still in the 52nd percentile, and just a couple days ago it was up around 60. So I was trying to get it a couple of days ago but didn't quite get the fills that I wanted to, and today we finally got in there. But we're playing this thing a little bit bearish. We think, hey look; it's a little bit of a downtrend, we're gonna continue to play that. We need another bearish position in our portfolio.

And what I like about this trade most is the pricing. So when I sent out the e-mail, I said this is a great trade because we are collecting enough premium to match the actual underlying risk in the trade. And we've gone over this a bunch of different times, but at the time we made this trade today, the probability of being in-the-money, which is currently at 21.64, was at 19 and change. So basically we were collecting a premium that was equal to and matching the actual underlying risk in the market. And so that's really what you want to look for in a lot of these trades.

It doesn't work on the put side. So if you wanted to add the put side, it wasn't working today to add the put side. So if you look here, this is an example. If you want to add the put and sell the 51/50 put spread, you will do that, and you'd have a 20% chance of losing. Well, that means that you need to take in a credit equal to 20% of the width of the strikes. Strikes are about a dollar wide, so that means you need to take in a credit of at least 20 cents.

And you can see on the put side; you're taking in credit that's 6 cents below that. So you're not getting compensated enough for the actual risk that you have in that underlying trade. And so it's weird. It only worked on the call side, which usually doesn't happen. If it usually works on the put side, it'll work on the call side, or maybe the put side alone. But in this case, there's a lot more activity on the call side, so pricing was a lot better. Maybe people are betting on this thing going down much more than they're betting on it going up.

Alright, so that was one of our monthly trades. We did have three new earnings trades. We did two straddles ... I'm sorry, one straddle in CROX. Went ahead and did the straddle that was in CROX. I think we might be missing one here. So yeah, hold on, let me pause the video here. Let me add that real quick because I think we are missing one. Okay, back now, and we do have the other trade that we have which is WFM.

So we did two straddles today, the first is in CROX. This one is a little bit different because they didn't have weekly options, so we did have to go out to the August options. I think it's still a good trade because implied volatility's still high. We sold, again, the at-the-money straddle, which is the 14 call and the 14 put for a $1.52 credit. Again, with CROX, implied volatility still very very high, in the 77th percentile. So I'm assuming that this thing is gonna have a nice little drop in implied volatility.

Hope this stock isn't all over the place. But again, we had to go with the August contracts because there are no weeklies available. And August was still pretty active. I mean, not a ton of activity in these contracts, but it's for August, and so it's a little bit meant to be the fact that there's nobody trading these August things for earnings, maybe except for us and a couple of our members. So I still like the trade right at the money, the stock closed 14.13. Expected move's about $1.34. And so we took in a nice credit of about $1.50.

The next trade that we did is a strangle in Facebook. So we went all the way out and sold a nice wide strangle in Facebook, the 106 call and the 87 put on the market. Took in a nice big credit of $1.70. It looks like Facebook announced earnings after the market had closed, and the stock is trading just a little bit lower at 93.80. So, well within our expected range.

We had a nice wide profit range here in Facebook, selling something so far out of the money. And again, the reason we decided to do the strangle was that implied volatility was high. So Facebook had great implied volatility, it's obviously a big-name stock, lots of people are trading Facebook. Again, implied volatility in the 84th percentile. You know, we were selling options down here at 87 and way above the market, so it looks like it should be a really good trade. We should make a full nice big profit of about $170 on that trade.

The next one that we did is in Wynn, WYNN. Same thing, we did a nice wide strangle. We did the 105 call above the market; the 87 put down below the market. Looks very similar to Facebook, even though it's completely different, and took in about the same premium at $1.80. So, nice premium in Wynn as well. Wynn has been on a little bit of a downtrend, and so hopefully we might see this thing maybe pop a little bit, but I think that they did announce earnings after the market closed.

Yeah, and so the stock is trading just up a little bit at around 97. So you can see the stock's trading after hours around 97. Very little movement in the stock. We had our strikes and break-evens all the way out here around 85 and up to around 107. So again, should be a nice big profitable trade for us. Should make about 180 bucks on this trade tomorrow.

The last trade that we got into is a straddle right at-the-money for WFM. Now this one was a little bit different. I had an order placed to do the strangle and do it just a little bit wider, but said, you know what, implied volatility good in WFM, why not do the straddle, pricing was really good, and make a go at it. So pricing was ... or, implied volatility, up in the 94th percentile.

Extremely, extremely high. And we know this thing has a history of seeing a drop in implied volatility. It's just a mover. I mean, this thing is gonna be a mover for sure. So when we did the at-the-money straddle, right over the market, we took in credit that was more than the expected move. So that was nice. We took in a credit of about 356.

Expected move was about 335 or so. After hours, the stock's trading down to 36.24, which is just outside of our expected move. So you can see right here that we had pinned everything right around this 40.5 strike right here, and our break-even points were wide. Right now, the stock is trading just outside of that marker right now, so tomorrow looks like it could be about a 60, 70 dollar losing trade.

I mean, in the grand scheme of things, it looks like we have some good trades on for earnings tomorrow. We'll look to adjust Whole Foods and maybe continue it on like we did with Yelp and some of the other ones that we have. But we'll see where it opens tomorrow. These things can be all over the map after hours and right before the market opens. So hopefully it doesn't move too much lower, and maybe we get a nice little bounce back higher. Okay?

So as always, I hope you guys enjoy these videos. I know this one was a little bit longer, but we had a lot of stuff to go over. As always, if you guys have any comments or questions, please add them in the comment box down below. 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.