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Earnings Trade

On 09.10.2017, Relative Implied Volatility (RIV) on our watchlist for Fastenal Company (NASDAQ: FAST) was a bit above 50 (was around 86), we decided to sell a straddle on our earnings candidate. Earnings announcement is on October 11, 2017 market open.

The Strategy
On October 09, 2017 market open STO straddle with the 46 strike expiring in 11 Days on Oct 20 give us a net credit 272 USD (273 – 0.7.) One of the legs will always be ITM. 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, 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 Risk

The Broker withholds margin of 1004 USD. We are eventually dealing with 4,600 USD per option contract (100 shares of FAST per contract) of potential FAST stock if called or exercised. 1004/4,600 = 21.83%. Close to a fifth of the stock value as margin is a conservative enough risk estimate for us by experience.

Let´s see what tomorrow holds.. 🙂

For details, see also Home Page.


The Buyback

On October 11, 2017 FAST crashed. The first half hour of market open allowed bargain back the whole straddle at a price of 270.7 USD (270 + 0.7 fees,) netting us a profit of 1.60 USD. The Midpoint was 277 USD but was closeable at 270. Technically, I could have waited and closed the trade an hour later for more profit but I just had to manage and get what I can at the moment or risk getting more left out from the trade.

Below is the snapshot 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 FAST options (and the straddle) was at the moment I closed them. This very same time I just got out of my earnings trade on CUDA which went better than this one.

Our Watchlist

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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