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Earnings Trade

We picked Walt Disney (NYSE: DIS) from our watchlist at dgroeschke.com to play with for our earnings trade. Walt Disney earnings announcement is on November 9, 2017 market close.

The Strategy

On November 9, 2017 we decided to open a put calendar spread via the following order seen below:

The order below involves selling call options with the 103 strike allowing us to use the credit to purchase the back week option (1 week back) and bank on 3 things:

  1. The IV crush of the front dated option: IV of the options nearest to earnings are much higher than the normal IV of the back period option chain. This bloats the pricing of the front week option. Once IV normalizes after earnings, provided the price stays more or less the same, the credit you sold has a lower buyback price therefore making the combo more expensive and while your back week option stays more or less the same value (provided with the same assumption that price does not move much), you can sell back to the market your combo for a more expensive price than you paid for.
  2. Theta on the front week is more than the back weeks. In short if price doesn´t move materially, you get the difference of the front theta minus back week theta per day.
  3. Net debit strategy. No Margin required. Max loss is debit paid- 15 USD in my case plus 1.25 commission. Goal is to sell for more $$$.

Option chain snapshots provided for reference in case you guys get curious.

 

The Risk

My risk in this debit strategy is the price I pay for the combo since it is perfectly hedged with the back week option. As mentioned above, I got filled for 15 USD debit with comissions of 1.25 USD. Most I will ever lose is 16.25.

 

Let´s see what market open holds.. 🙂

For details, see also The Walt Disney Company Investor Relations Page.

 

Closing Out

I am human: Interestingly I saw the 1D  expiry option (the one that should be used for earnings here as front leg) 5 minutes after market close. Since it had a good boost on November 10, 2017 market open, initial thought for was keeping it open for the November 17, 2017 leg to expire or purchase back for almost nothing and sell my hedge after. On Oct 13, 2017 after market open, my open order to sell the combo for 25 USD got triggered.

Net of everything profit was 7.50 USD for this one trade (derived from: 25 – 1.25 – 15 – 1.25).

Return on Capital on this one is 46.15% (7.50/16.25). In effect not bad at all specially if you did this with a couple of combos. The original trade with the planned expiry would have netted me much more but here was the actual trade conducted and closed folks.

Pics of option chains for both expiry posted below for your reference and study.

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 Walt Disney.

 

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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