$224 1 Day Earnings Option Trade Profit in YUM

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Option trades on earnings: In tonight’s video, we’re going to go over all the trades that we made for July 15th, Wednesday. Sorry, this video is a little bit late. Me and my wife are in the middle of a pretty big patio project that hopefully should be completed tomorrow. We’ve been just working late at night, trying to get that done.

But I just want to get this out for you guys today. Not much on the radar today, other than just earnings trades. We closed out of both our CSX and YUM earnings trades from yesterday. YUM ended up being a nice profit, about $244, bought back our straddle right after the open. Same thing with CSX, a nice little profit in CSX and a pretty good percentage of profit based on the credit that we took in here, bought back our straddle right after the open about $80 for those.

And indeed, nothing here, more than just a mechanical entry and exit with earnings. YUM had high implied volatility, we went ultra-aggressive, ended up paying off, implied volatility dropped down to the 63rd percentile, so it dropped almost 40%. And then the same thing with CSX, we saw implied volatility drop as well.

The stock opened up much higher than anticipated, but quickly fell back down into the range that we had expected in our breakeven points had prepared us for. We saw a drop in implied volatility, not a huge one in CSX, but it was enough, given that we had traded the front contracts to see a nice little profit.

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We did have two new earnings trades that we got in today. One is on eBay. We went aggressive here on eBay as well, high implied volatility. With eBay, we did the 63 ½ call and the 63 ½ put, took in a nice big credit of $2.44. I believe at the time that we entered this trade, the expected move in eBay was about $2.30, so our credit more than covered that difference because our breakeven point is going to be $2.44 above and below 63 ½.

So eBay announces actually earnings tomorrow morning before the open, so we’ll have to see what happens tomorrow morning before the open. But you can see that it's had high implied volatility, it tends to be a really good stock to trade around earnings because even though it does jump a little bit as it should with just technology, internet stock, it has a really good drop in implied volatility that usually follows earnings.

In our case, what we did here with eBay is we went out just a certain distance on either end to cover the expected move. Here's the expected move in eBay, about $2.31. We wanted to make sure that we were going just beyond that on either end. And you can see we traded the front most contracts, they've only got two days left, these are the contracts that have all the volatility juice and premium in them, and we did things right at where the stock was trading or as close to it as possible.

The stock was trading at $63.44, trying to be as neutral as humanly possible in this, and we sold one of the $63 ½ calls and one of the $63 ½ puts. And again, that credit that we took in on both of those gets us beyond that expected move of about $2.31. Statistically, it's about a 68% to 70% chance of success trade. And again, we'll see what happens tomorrow when eBay opens up.

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The other trade that we did today is in Intel. Intel did announce earnings after hours. Let's show you here exactly what we did with Intel. We did things a little bit different with Intel because it is a lower priced security, it’s down on the low 20s, mid-30s. And given that, if we wanted to do an iron condor or even a strangle around Intel, we wouldn’t be able to collect a lot of premium based on where it was trading today, maybe $10, $20 on each end, so we’re looking at $40 or $50 overall for just a regular strangle just outside of the expected move.

Instead, what we decided to do is do things a little bit different. We did an iron butterfly in Intel, and what that means is that we are selling these front numbers here, the 29 ½ on both sides, both the call side and the put side, we’re selling the 29 ½ straddle right over the market, very similar to what we did with eBay. And then just to give us a little bit of protection, we went out to the 33s and down to the 26 puts to buy protection.

Now, we paid a little bit of money for that protection, but you’ll see here in a second that it wasn't a lot of money because those were trading for a couple of dollars apiece. For a couple of dollars, we gave ourselves a risk defined position that also had a very nice credit. The overall credit after we paid for our protection at 33 and paid for our protection down at 26 still gave us a nice overall credit of about $1.38 which did in fact, cover the expected move.

Here's what happened after hours for Intel, so you can see what happened after they announced earnings. There is a pretty big spike, stock was up to about 32.43, and you can see that it had a pretty dramatic fall since then in after-hours trading. I would expect that the stock opens somewhere in the 30 neighborhood, maybe 30.20 or so, 30.40 maybe the high-end. But we’ll have to see what happens.

I just wanted to show you guys this is a pretty dramatic impact here that can happen in just the course of a couple of hours. It's not that stocks will always open high, have after-hours trading and open higher, and then open higher the next day, and sometimes in after-hours, things can change. If the conference call goes really bad or the management says something that investors don't like, then the stock could end up going higher or could end up going lower.

I just wanted to show you guys that visually here. On Intel in the option chain, you can see… Let me change this layout here, so you guys can see this. If we did like let's say just the strangle that was just outside of the money on either end, if we did a strangle at these two strike prices, say 28 and 31 ½, you can see that we wouldn't collect too much premium to go that far out.

On either end, maybe $11, $17, it just wasn't worth doing a strangle and having all of that exposed risk trading too naked options for a combined $30 or so in premium. That’s why we didn’t do this strangle in this case, although we could’ve for sure.

Instead, what we did is we sold options right at the money at 20 ½. And then you'll notice that we only spent a couple of dollars going out to the 26 options which were only about $3 or so and did the same thing on the top side. We went out to the 33 options which were about $3.

For $6 of premium that we gave up, we still were able to collect a very healthy credit just in case the stock landed in between or very close to where the stock is trading right now or close for the day. We were able to take in a pretty healthy credit, and we did a position that is completely risk defined. Here's what Intel looks like after-hours. You can see it’s trading just a little bit higher.

It’s trading up around 30 or so, so this isn’t reflective of that. But it looks like it should be a profitable trade tomorrow morning and we should have a pretty healthy profit here. We’ll see where it ends up opening up. But our breakeven points are up here around 30 and down around 28, so we do have a nice wide $4 window here for Intel to move in. Again, we'll just see what happens tomorrow when the stock opens.

On a quick side note, we did still keep our Netflix trade after the stock gets split. We talked about the stock splitting numerous times on the weekly strategy call with members, elite members that is. The stock did go through the split yesterday, that’s why we’ve got all of these crazy strike prices, but no harm, no foul, there's still lots of open interest and volume here.

Open interest is not going to reflect over until tomorrow. All of this activity, because their new strike prices are not going to push over then into the open interest column just as an FYI because I did get a lot of questions about that, it’s not going to pushover until tomorrow. Open interest is always a day lag in the market, and they always see what's left after the full trading day is done.

In this case, we did have our puts which are down below the money and out of the money. We’re not going to touch those. Those aren’t going to be challenged at all. And we did have our calls which are up here around 107.14, 107.86. You can see we left those there because the stock closed at 98, the expected move was just about $8, so we’re right on edge there.

And again, there’s no reason why we couldn't have left that there. We could’ve taken it off if we wanted to, but this is a good earnings trade to make. High implied volatility heading into the event. We’re already outside of the expected move on one end. More than outside of the expected move below because we have the put so far lower

Now after-hours, it looks like Netflix is trading a little bit higher. It’s trading at about 107.94, about 108 or so. It’s right in the range where it could go either way tomorrow. You can see it's just on the edge of our iron condor here, so we'll see what happens tomorrow. But if Netflix does open up and continues to stay higher throughout the morning, then what we’ll do is we’ll close out of our position here in July, and we’ll roll this position to August, we’ll roll out to August, that’s our standard practice.

If you’re new as a member, going through these earnings adjustments, please go back and look at the earnings trading module, so that you have a good idea of what we do with adjustments to trades if they get challenged. The first thing that we’ll do is we’ll close out of our July position; we’ll reestablish the August position at very similar strike prices if we can, trying not to move it higher, and then what we’ll do is we’ll bring the put side up in August as well.

We'll probably just leave these July options on to expire worthlessly, they’re so far out of the money now, they’re not going to be challenged, and then we’ll just reestablish a new position in August that’s very, very close, trying to create a really narrow and tall iron condor or iron butterfly for Netflix, trying to get back some premium in case this thing goes against us. That’s the game plan moving forward.

As always, I hope you guys enjoy these videos. If you have any questions or comments, please let me know, ask them in the comment section on the web page. 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.