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Earnings Trade

On 16.01.2018, we sold a straddle on Alcoa Corporation (NASDAQ: AA). AA earnings announcement is on January 17, 2018 after market close. Alcoa seems to be the only known ticker priced nicely so we gave this a go.

The Strategy

On 16.01.2018 before market close we sold a Straddle on the 56.50 strikes with the following order seen on the trading panel and got filled for 2.95 (295 USD credit received). Related fees were 0.51 USD.

Main Points of using Straddle for earnings:

  1. You are banking on receiving much more credit than usual from selling high IV options that will lose a big part of its 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. Our breakeven points for the credit we receive will be somewhere around 53.50 and 59.50. This trade allows us a 5% up and 5% downmove. Should the price move beyond this area we will lose on this trade.

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

The Risk

The display shows that our broker withholds margin of 1,154 USD – about 20% of current price which we also practice as a rule of thumb of calculating initial max risk in our naked strategies.

For details, see also Alcoa Corporation Investor Relations Page.

The Buyback

Investors sold off Alcoa on earnings disappoint and the stock was around 53 at market open. Option chain on January 18, 2018 open shown below:

At market open, I wasn´t sure if the price would bounce back my way and noticing the 56.5 puts being priced at bid ask of 410 and 440 USD, which was definitely more expensive than its fair value, I decided to wait.

My quick fair value estimate was as follows:
(strike – current price) * 100 = (56.5 – 52.92) *100 = 358 USD

* My recourse at the end of the 18th when the stock ended at 53 was to accept assignment and issue covered calls with the 55 strike to lower my cost basis and use the stock to generate returns before I rid the position. My breakeven point should I not buy back my option positions would be 5,355.51 USD (56,500 – 295 + 0.51).

 

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 and other high promising option trades.

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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