OptionPundit

Category: Iron Condor

  • Another Way to Play Priceline (PCLN) Earnings

    Priceline (PCLN) is set to report it’s earning after market close today. According to briefing.com, consensus is $9.29 for EPA while revenue consensus is $1.416 billion. During the past 8 quarters PCLN has consistent outperformed the expectations, usually by a wide margin.

    Based on current Implied Volatility, it is expected to move roughly $36-$38 in either direction. If you look at the IV profile, there is a huge SKEW between Nov weekly and Nov, and then in Dec and Jan series as well. Going into earings, IV is highly elevated as well.

    It’s no secret that IV will crash after the earnings. Generally by 40-45 points in the front and roughly 10-15% in the 2nd back months (in this case Dec).  By the way, if this happened in the past, that doesn’t mean it will happen again in the future as well….it’s just that, based on past experience, IV crash, in this pattern, is likely to happen.

    So how could one possibly play PCLN earnings?

    If you are willing to take directional risk, then 440/450/460 Put butterfly for roughly $0.40 debit (mid quoted as of this writing) could be an speculative play assuming you are bearish like me. The watch out here is-> if PCLN moves positively, then this fly is a toast. You will lose all the capital invested. You might choose similar type butterfly say 550/560/570 call butterfly as well (for a what if on the upside). The watch out with such a strategy is that you will lose capital on both sides if PCLN doesn’t move as much.

    There is another popular alternatives as well e.g. Selling an ATM money straddle which will cost roughly $14K (you may reduce that cost by buying wings, essentially converting into a fly) but again you may have to weight the pros and cons of an strategy vs it’s potential rewards.

    While there are a lot of choices to play e.g. Calendars, back spreads. ratio spreads and so on, I prefer to play via a  Dec 2011 Iron Condor. Specifically, the Trade structure is like this-

    (more…)

  • How to Play AAPL, ISRG Earnings

    It was first posted for the OPN Income Newsletter’s Members.

    Before you read further- please assume 100% loss upfront on whichever trade you take. Even though we might have win numerous times during the past (like GOOG recently), the chances of being correct are no better than flipping a coin. After screening all the tickers that are about to announce earnings after market close today and before market opens tomorrow (roughly 56 companies), here is my short list that I think will move and is worth spending sometime…

    AAPL, CREE, ISRG, JNPR, BLK and FCX

    – ISRG, I prefer to open a NOV 420/430 (Bear Call) and 350/340 (Bull Put), roughly $4.70 credit as of this writing. The stock is expected to move some $25 or so, but the kick here is IV crash which should benefit the condor. Based on my past experience opening of Oct options is easy but closing those is hard (for a good price).

    I think CREE, JNPR, BLK and FCX will not have pretty numbers. Either they will miss on earning, or revenues (most likely) and/or outlook. So I am biased for bearish trades. However, I couldn’t find good risk/reward structure. One needs to take risk here.

    – AAPL . I think they will announce “wonderful” numbers. No questions about it. But I think they are going to keep buffer in their pocket for the next quarter..for “what if”.. as that will be first quarter without SJ’s presence… there are two scenarios with AAPL.

    1. Gap-up and then fade throughout the day or
    2. Gap down.

    I think 2) is the most likelihood but I have not met a single person who ever shorted AAPL. In case of AAPL Oct 390/400/410 Bear Put Butterfly seems to be a better risk/reward. I personally wouldn’t open bullish positions on AAPL. If I will, I’ll probably play with weeklies after earnings announced and stock gaps higher [i.e. scenario 1). ]

    So bottom-line, I’ll assume 100% loss upfront and open a bear put butterfly on AAPL (debit $1.40 or so).

    Disclaimer- As of this writing, I was long AAPL Oct 390/400/410 Put butterflies.

    I shall update results post earning announcements.

  • OPNewsletter Oct’10 Up 7.7%, Gear-up for Earnings

    Undoubtedly GOOG earning play was a star trade generating over +800% gains in a day. It wasn’t sheer luck, we prepared ourselves for it. I shall share our exact trade after earning season is over as we plan to use similar strategies for AAPL and later for some more counters during this earning season.

    For the month of Oct expiration, OPN portfolio gained +7.7% on a maximum investment on 63.8% of the portfolio capital. This was our 32nd positive month out of past 34 months despite the worst financial crisis since the great depression. These results exclude P&L from speculative trades or trades mentioned on the OptionPundit blog or on InvesCafe. Here is the tally-

    – POT Income Portfolio: +45.9%
    – NDX iron Condor: +1%
    – Google OPN Portfolio: -16.7%
    – DIA: -2.08%
    – EWZ: +2.9%
    – IWM Portfolio: +10.9%
    – NKE Income Portfolio: +91.5%

    However, as I shared fills for my speculative part of the NDX iron condor trade, the trade generated +37% on the original base of $2K/ spread. That’s a magnificent returns considering that NDX moved over 200 points in one direction only and we didn’t do any adjustment since Sept 21.

    POT This was another star portfolio that generated excellent returns >+45% for less than 1 weeks holding. This wasn’t a speculative trade, but we let it run as the gains were accumulated due to rising IV while underlying didn’t move much. Google Income portfolio didn’t work out as I was expecting. I didn’t use any other combinations of backspreads/verticals/straight calls or puts (like I did in July) to keep it simple. I have shared my perspective about this portfolio. We played NKE earning as part of Income portfolio and within a day of holding this portfolio generated 91.5% returns.

    OP Speculative trades-
    These are bonus trades and are not part of the OPNewsletter and hence the P&L IS NOT part of OPNewsletter performance. We spend only a fraction of the overall capital for these trades and think of it is as accelerators (if we are right) but not as a dampner (if we are wrong). For instance, the Google trade delivered almost $1,500 for each $175 investment (for those who had $10K capital) that alone accelerates the capital gains by roughly 15% on the overall portfolio capital.

    We were stopped out of TLT, TIN was almost break-even. MOS generated +12 to +17% gains for one day holding, JPM generated from -55% loss to +100% profits; then we had great wins/partial loss on USDJPY pair via YUK calls

    OPBlog Trades– Gold, suggested on Sept 2 when it was around 1,250 and since then gold is up almost $100/ounce.

    Invescafe/Twitter Positions– I don’t send alerts for these trades as these are neither part of OPN nor bonus trade alerts and the key reason is because the trade time span can be from 5-10mins to hours and OPN members may not be able to reap benefits as by the time they receive these alerts, it will be too late for them.

    SIGA for +80% for 1 day holding, EQIX for > +50% profits, intraday,  TBT 30/28 BPS > +50% profits, TBT up over 10% since then, AXP +9%, AAPL, NFLX generated +150% and there are many more, check out my InvesCafe updates.

    While reviewing these results, pls keep the overall macro economic environmental context in mind. Sept (usually a bad month for markets) was a record month for S&P500 almost in 50years, a challenging month of non-directional income traders!!! The uncertainty is unusual, short interests are sky high. Yields on both Bonds and Stocks are almost at bottom. The expectations on returns are dismal at best.

    On the other hand, here at OptionPundit, OPN members/readers out of “stocks” since early April 2010, reminded them there is no such thing as “America Won’t recognize itself by the end of 2010” as projected by several top analysts and time and again talked about Feb Low, 10.3k and 10.7K for Dow. We are not taking unnecessary risk yet our returns are still respectable by almost any rationale standard.

    Trading is not about beating the market, always. No one can do that. Just like any other business, trading is a business and needs to be treated that way. We’ll have our shares of wins/losses. As long as we are humble and keep the “ego” at bay, learn from our mistakes and continuously sharpen our craft we’ll develop our own trading style. And if it is indeed a business then it’s not a destination but a journey through thick and thin of varying seasons.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    It was and still is, preserving capital is more important than a potential opportunity. Capital is for real, opportunity is “potential”.

    Congratulations on another successful month.

    Profitable Trading, OP

  • How to Play Google (GOOG) Earnings

    How to play Google (GOOG) earnings and how to benefit from Implied volatility crush post google earnings is on the minds on almost every option traders I have met or spoken to. But before I proceed further let me share that earnings are usually 50/50 at best i.e. in-spite of complete detailed research you may still end-up being wrong. The chances of win are 50%. If you go with that assumption and are willing to take increased risks for potential windfalls, Google (GOOG) Certainly offers great opportunities for option traders.

    I have been covering Google earnings for almost 4 years. I also provided 4 different option trading strategies on how to play google earnings. For additional reference, LiveVol has done has done an excellent job on explaining past earings and Google’s move post earnings. You may want to check that out as well.

    So let’s begin the current journey. Let’s first look at the IV skew; There is almost 40+% IV skew between Oct and Nov options most of which will narrow by tomorrow (Chart is from LiveVol.com). So a simple inclination will be to sell the expensive IV and buy the cheaper IVs. That’s a good conclusion except that is not without its own risk. Here are a couple of options that you might look into playing (Ref- GOOG last traded price was $543.3)

    1. Buy straight call or straight put. Based on recent past history you may conclude that Google (GOOG) tends to move say $20. So you may want to buy Straight Out of the Money (OOM) Oct 560 calls or 520 Puts. Last mid quote for 560 call was $5.00, and for 520 put, it was $3.00 either google needs to be above $565 or below $517 before you can make money if you purchased straight calls or puts. But here you are assuming a directional as well as movement risk.
    2. You may choose to buy a strangle i.e. Google (GOOG) Oct 560 call AND Oct 520 Put, thus costing $8.00 combined. In this case google needs to be above $568 or below $512 before you can make money. But at least you are not taking any directional risk.

    I personally wouldn’t want to take #1 and #2 options. If I were to choose, I might then choose even further OOM and that too as lottery ticket assuming 100% capital loss upfront.

    So How can one increase chances of success while still hoping for good yield from Google earnings move. Here are few more examples.

    • Sell Google (GOOG) ATM Oct 540 straddle i.e. Sell Oct 540 Call and Puts, as of the market close yesterday it was $22.65/spread i.e. you will receive $2,265 credit but need to keep about $11,000 for margins. This trade will make money if Google is in between $517.4 and $562.6. The maximum gains are equivalent to the credit you received and if GOOG is pinned at 540 on Friday. Expected yield is 2265/10,900= 21%; the risk is that you might lose all the margins if GOOG moves wildly beyond the break-even points.

    • Well you may think that you don’t like above risk reward, but you still think that Oct ATM is pricing the Google move appropriately and hence would like to keep the same break evens but with a better yield. So how about selling an Iron Condor say Google (GOOG) 560/570 Bear Call spread and 520/510 Bull Put Spread. This will generate $367 credit on a $633 margin thus yielding 58% gains assuming Google remains between 520 and 560. The Breakevens are $516.3 and $563.6. The max loss will be if google is below 510 or above 570. Certainly a better option than #1.

    • Still don’t like the yield but willing to trade-off risk for even better yield. Other ways to play is that you can choose 10 points Butterflies with the mid strike at 540, 530 or 550 depending upon your outlook. Butterflies offer fantastic yield but then Google has to settle within that zone. Here is an example of GOOG $570 Call Butterfly (You may check out past examples here).
      • Buy +1 GOOG Oct 560 call and
      • Sell -2 GOOG Oct 570 Call and
      • Buy +1 GOOG Oct 580 Call

    Google Oct 570 Butterfly

    This can be done for only $83. If GOOG is pinned at 570, this trade will yield $917 that’s almost 1,100% returns. This trade will still make money if google is in between ~561 and 579. The risk is, you will lose 100% of the capital if google is beyond these breakeven points.

    • A little more advance option will be to combine a butterfly with either straddle or Iron Condor. That will result in better gains assuming you are right-on for the ATM strike. But even if you are not then remaining Straddle or condor can still make money.
    • These are just some of the examples how Google earnings can be played. Others include Calendars, Double Diagonals, Backspreads and ratio spreads and many more.
    • If however, you are willing to spend time and make even more educated guess, then don’t forget to check out these articles

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Happy Googling and wish you all the best

    Disclaimer– This post is for information purpose only. Please do your due diligence before investing even a single dollar based on any of the contents on this site including this article.

  • OPNewsletter Aug +8.4% (closed), Sept +4.3% (Open)

    OPNewsletter delivered +8.46% for the Aug 2010 Income portfolio on a 51% portfolio capital investment. As you may know, since mid of April 2010 we reduced our capital allocation to trading as we were anticipating this market meltdown which started around 3-4th week of April. For Sept 2010 opened portfolios, we are up +4.3% and these results do not include results from speculative/bonus trades.

    This is our 31st positive month, out of a total 33 months of Paid Subscription based OptionPundit newsletter throughout the phase-1 and phase-2 and these times include one of the worst market conditions since the 1930s.

    At present, OPNewsletter clients include ordinary part-time traders to professional Wall Street traders (trading their personal accounts) from over 20 countries and their trading experience varies from a few years to almost 2 decades of options trading. The live forum lives to help where community of traders share ideas and comment on other’s trades as well. Not only we do Iron Condor, we also invest Calendars, diagonals, double diagonals, backspread and many more. We have also started reviewing (with real-money) option trades for newly introduced weeklies (currently AAPL is up +24%, AMZN is up +30% and GOOG is almost breakeven). This is how whole trading experience comes to live real time.

    Trade what you know, learn what you don’t know !

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Delivering consistency isn’t about trading 1 Iron Condor/month for a small size capital account. When you are trading a US$100,000 account that requires patience, discipline, a well defined control over greed & fear and strategies that are beyond just 1 Iron Condor. And there are many traders in OPNewsletter who trade with over US$100,000 capital. Preserving capital then takes higher priority order as opposed to investing every opportunity you see. At times, you will let go opportunities (hindsight bias) in anticipation of major market moves that might derail the portfolios. We place hedges, which sometimes are one of the dampeners for higher results but that’s ok, that’s part-n-parcel of trading life.

    No matter how much marketing blitz would like you to believe, there is no “secret” to trading success; it is the EXTRA DEGREE of perseverance, EXTRA DEGREE of risk management, EXTRA DEGREE of disciplined trading, EXTRA DEGREE of what if scenario planning and EXTRA DEGREE of “Rational Expectations”.

    Welcome to OptionPundit! The EXTRA DEGREE in your option trading.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

  • OPNewsletter Jul 2010 Up +8.3%

    We are on track for our 28th positive month of OPNewsletter phase-2, as of last Friday close OPNewsletter Jul 2010 portfolio is up +8.3% on the maximum investment of almost 60% of portfolio capital. We have started opening Aug 2010 portfolios and our first portfolio is already positive.

    Let’s talk consistency first, especially on trades like Iron condor which is probably the most widely used option trading strategy. OPNewsletter has lost only 1 month of RUT iron condor since May 2008, and the drawdown was only 7.15% while gains have been around 12% on average per month. RUT Iron Condor for July 2010 resulted into +23% gains. If someone has invested US$10K, only in OPN RUT Iron Condor, this 10K would have grown over 5 times to $56K since May 2008. This period includes probably one of the most volatile stock market moves of our lifetime. Of course, I don’t recommend traders to invest all the money in iron condors only and which is why we have portfolio approach at OPNewsletter, to diversify risk/rewards.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    During the month of July, we also opend, for first time, an Income portfolio on Google. Just for perspective, since our opening of this portfolio on June 14th, google moved from $480 to $506 and then from $506 to $434 almost without a pause. This portfolio has provided a great deal of learnings e.g. during this period, one of our backspread we opened for only $0.65 debit moved past to show $10 gains!!! Though it was tough and very volatile move, we still managed to gain 4% gains as of Friday close (still open) and we are in for the earning week and out theta gains are a few % points per day.

    Even though VIX and other implied volatility fell through the cliff in general, our Double calendar resulted into above +20% gains and Double Diagonal in positive (still open).

    These results do not include gains/losses on the speculative trades. It also feels good when I find adding value to subscribers as OPNewsletter members were already warned of the coming meltdown since mid April via constance market updates/projections. Though no one can be perfect or correct all the time, so far OPN has been able to serve well.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP