On 09.10.2017, Despite Relative Implied Volatility (RIV) on our watchlist for (Barracuda Networks, Inc.) CUDA was a bit below 50 (was around 43-46 the way I remember), we still decided to sell a straddle to play with for our earnings trade after a bit of research. CUDA earnings announcement is on October 10, 2017 market close.
On October 09, 2017 market open straddle with the 25 strike expiring in 11 Days on Oct 20 give us a net credit (282-1.04 fees) = 280,96 USD – more or less same potential risk. One of the legs will always be ITM since this is a straddle. Strategy 1. is to buy back the combo on the first market trading hour right after earnings is officially announced. (after they announce earnings post today´s market close.) If not possible, and the movement renders combo unpurchaseable through BTC (buy to close) order (which is more possible with CUDA than with our past showcased earnings trade on NKE), then we explore other options either get exercised and sell covered calls or if not practicable just close out with as little loss as possible.
The Broker withholds margin of 679 USD. We are dealing with 2,500 USD per contract (100 shares of CUDA per contract) of potential CUDA stock if called or exercised. 679/2,500 = 27.16%. Close to a third of the stock value as margin is a conservative enough risk estimate for us by experience. If you notice the stock here is jittery on sell off days. Going beyond the normal (1/5) 20% general risk we assume is ok and conservative for this one.
Let´s see what tomorrow holds.. 🙂
For details, see also Barracuda Networks, Inc. Home Page.
On October 11, 2017 CUDA crashed and SEC had its short selling restriction. The first half hour of market open allowed me to buy back the whole straddle at a price of 176.04 USD (175+1.04 fees,) netting us a profit of 104.92 USD.
Below are snapshots of the option chain at about 15:53 Berlin Time – some 23 minutes after US options market open today to give you an idea what price range the CUDA options (and the straddle) was at the moment I closed them. Was a handsome trade after all unlike the difficulty I had getting out of my earnings trade on Fasternal.
Our watchlist is programmed to reflect the relative IV of options. This automates the task of detecting option pricing advantages or disadvantages due to relative volatility. – thus allowing us to focus more on the creative part of the task – planning and strategics on trades that come on to our radar with the help of our watchlist. Should you be interested to use our watchlist, you can try it out for a month to month basis for 1,99 USD – with no long term payment obligation – this means that the subscription is cancelable any month you decide you don`t want to use the watchlist anymore. Here´s a screenshot of the watchlist as of September 25, 2017 that helped me pick out Nike.
Additional Risk Disclosure
Trading as is already exposes you to a material amount of risk and can cause material losses, even exceeding your initial investment. In addition, trading with margin and trading on or before earnings announcements increases that risk even more.
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