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Earnings Trade

On 13.11.2017, we sold a straddle on YY Inc. (NASDAQ: YY). YY 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 (see first pic) and got filled for 5.70 (570 USD credit received). Related fees were 0.50 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. This ATM straddle is a risky strategy when the price runs significantly  in off your strikes. In our case it allows us 7% move and still be in profit (refer to second pic). 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 2,022 USD. We are dealing with 9,050 USD per contract (100 shares of YRD per contract) of potential YRD stock if called or exercised either ways (call side or put side). 2,022/9,044 = 22.35%. This assumption is ok and conservative.

Let´s see what tomorrow holds.. 🙂

For details, see also YY Inc. 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. YY would have been a total loss should I have not been quick enough to come with an order to close the one leg deep ITM (my 90.5 Short Call). I was able to bargain the buyback to 612 USD, fees 0.50. Netting me a loss of 43.00 USD (570 – 0.50 – 612 – 0.50).

After taking snapshots and closing YRD I looked back and took a snapshot of YY. As a general rule, I look forward to close both legs on strategies I use for earnings trades to avoid risk of having to buyback the other leg when price does go back. Thing with this one is it was a strong enough rally and deep enough ITM that I could see I would be left behind. Below is exactly a picture of why straddles and strangles or butterflies have to be carefully and actively managed! Check out 90.50 how much it is an hour later!!!

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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