Quick $142 Profit on WFM Earnings Options Trade

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Earnings options trade: In tonight’s video update, I want to go through the two trades that we had today on Thursday, May 5th. The first one that we’re going to start off here tonight with is the closing trade in WFM which is our earnings trade in Whole Foods. Now, Whole Foods announced earnings after the market closed on Wednesday, May 4th.

We went over this video just the other night, and you can apparently go back in the archives and check out the video that we had. We had originally sold the iron butterfly for a $237 credit. Today as expected, the stock opened up inside of the expected range. We did exactly what we said that we were going to do on the video update last night which is just buy back the inside straddle. All we were doing is buying back our short legs on the inside; that was the 28 call and the 28 put.

We bought that back shortly after the market opened. You can see it just about a minute after the market opened. That’s how quickly the drop in price happened between $237 and $95. It just happens almost instantaneously. And we were able to buy it back for a $95 debit to lock in about a $142 profit on this very, very quick trade.

We weren’t in this trade all that long and got into it earlier in the afternoon on Wednesday. We gave people plenty of time to get into it. We got into the trade on Wednesday about 2 o'clock in the afternoon. The market closed at 4:00 East Coast time, so it gave people a lot of opportunities obviously to get into this trade.

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I think what’s cool about this trade just as a little case study here is that we saw that drop in implied volatility happen so fast which is to be expected because Whole Foods is a great stock to trade around earnings. And that was the key to making money on this. It’s that quick drop in implied volatility. Now, one of the things that we always like to do is we always like to close our position early in the morning right after the market opens.

Sometimes, we’ll get filled right after the market opens a minute or two. Sometimes, it might take 5 or 10 minutes to get filled. But when I say right after the market opens, it’s shortly after the market opens and pricing and volume start coming into the security. Now in this case, if you close anytime in the early morning, you probably had a nice profitable trade. Remember, our strategy was centered at 28 ½, so anything right around there, and the stock open around 29, was going to be profitable.

Now, at the end of the day, if you wait in, you were greedy towards the end of the day… And I know some people have emailed me since then and said, “I wish I would’ve closed it earlier in the morning.” If you waited towards the end of the day, this is something that can happen or can tend to happen as where the stock just rallies big, and you might be stuck with something that ends up not being able to be a profitable trade at the end of the day. That's just my two cents here on why you should close out trades early in the morning after you enter them.

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Another trade that we got into today… We got into another set of GDX strangles. This is just another continuation of our position in GDX. Implied volatility remains relatively high, 65 ranks. The probability of profit on this trade is about 72%. And again, if you are trading an iron condor, you can look into the trade comments.

If you have an IRA or a risk defined account, you can look and see we suggested that you purchase the 16 puts or 31 calls. You can obviously go further out or closer in. It doesn’t matter in that case what you do. But with GDX here, the whole point is just to continue to leg into or ladder into different positions. And what we did here is sold options that were at the 15% probability of being in the money on either side.

The 28 calls above the market, the 19 puts below the market gives us an excellently balanced trade as we continue to move here we GDX. The 28 calls are all the way up here; the 19 puts are all the way down here. You can see we’ve got a wide range here. This is our profit window here on this particular set of strangles with GDX. It gives the stock a lot of room to move and still an excellent opportunity to make some money. I still like this trade a lot.

I think this is a good position to be in. We continued to make some money in GDX, closed out of some positions in it last week, and we closed out some SLV this week. This whole metal sector right now that's going through a rotation in higher implied volatility is working out to be very beneficial for us.

We’ll continue to go back to the watering hole as much as possible. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the comment section. 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.