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Earnings Trade

On 13.11.2017, we sold a straddle on Yirendai Ltd (NYSE: YRD). YRD earnings announcement is on November 14, 2017 market close. Some people avoid earnings trades and some people avoid naked strategies due to the risk that comes with it. But in my own personal opinion if the price is right, its as good and rewarding (sometimes even more) as any trade.

The Strategy

On 13.11.2017 market close we sold a straddle with the following order seen on the trading panel and got filled for 5.10 (510 USD credit received). Related fees were 1.60 USD.

Here is the main takeaway on straddles for earnings:

  1. You are banking on receiving much more credit than usual from selling high IV options that will lose value after earnings announcement. This is a strategy that allows you much margin of error for earnings because of the fat credit should the price decides to whip here or there.
  2. An ATM straddle is a risky strategy when the price runs significantly  in off your strikes. Be sure to do your homework before picking your trades!

Your main goal here is to buy the combo back cheaper after IV crushes to bank a net profit.

The Risk

The Broker withholds margin of 1,142 USD. We are dealing with 4,352 USD per contract (100 shares of YRD per contract) of potential YRD stock if called or exercised. 1,142/4,352 = 26.24%. Close to a quarter of the stock value as margin is a conservative enough risk estimate for us by experience. If we notice the stock here is jittery on sell off days. Going beyond our normal (1/5) 20% general risk assumption is ok and conservative.

Let´s see what tomorrow holds.. 🙂

For details, see also The Yirendai Ltd. Investor Relations Page.

 

The Buyback

Seems to be a red day Where all my earnings picks have been rallying everywhere. YRD was salvageable but YY was a well managed loss trade. YRD buyback price after market open was 438.60 USD inclusive of fees. Net Profit of 69.80 (510 – 1.60 – 437 – 1.60). YRD was difficult to close during the first hour because of the initial selloff. Initially nobody wanted to trade with me 43.52 Short Calls. As I may have mentioned in some blogs we make best efforts to close all short legs involved in binary events like earnings just to eliminate the risk of having to deal with it later should price come back. In the end despite the initial rally we were able to come out clean with a bit.

Option Chain as usual posted below for your study and reference.

 

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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