Show Me How to Fish +100% in Polycom (PLCM)?

Published on October 20, 2011

Show Me How to Fish +100% in Polycom (PLCM)?

October 20, 2011

Polycom Inc (PLCM) missed both earnings as well as revenue estimates and as of this writing, PLCM shares are down almost 32% !!! Options were pricing a 18-20% type of move and this was also part of my “potential movers” list that I shared before market close yesterday.

So, with the hindsight benefit, how could one generate wonderful returns from such an event?

Recall, sometime back I shared a beautiful option trading strategy called “Backspread- Strategy for Large Moves”.

A backspread is the sale of an option(s) and the purchase of a greater number of the same type of options that are out-of-the-money with respect to the one(s) purchased. For example, an 80/90 put 1-by-3 backspread is long 3*80 puts and short 1*90 put. The Opposite for this trade is called Ratio spread.

As I mentioned, I was expecting a large move of roughly 20% on PLCM so I constructed a paper trade to experiment with this. The trade was-

  • Sell 2 Nov 25 Puts and buy 3 Nov 22.5 Puts.

This trade resulted in a $100 credit for every $400 risk. Maximum risk will occur if PLCM didn’t move and stayed at 22.5 by Friday expiration. Since I was bearish so I constructed a trade that will gain nicely in the bearish direction. Breakeven points were $18.5 and $25.

The Trade was closed for $3.20 credit. Thus overall gains are $100 +$320= $420, while the risk was $4.00, thus essentially delivering almost 105% gains.
What if PLCM actually beat the earninsgs and stock sky rocketed? Well, in that case I would have collected the $100 credit if PLCM were to be above $25 by this Friday expiration.

So all sound nice? What’s the catch?

One needs to be careful of the risk reward. The maximum loss occurs if the stock doesn’t move by expiration. Other loss is driven by IV crash post earnings announcement. To share an example, I was expecting TZOO to move almost 20% as well, but guess what? TZOO hardly moved after initial pop, and had I been in this trade, this would have been a complete loss. For TZOO I chose to play via strangle, which was also a loss as IV crashed and stock didn’t move much.

Earning Season is great. One can generate quick gains, as well as quick losses. So be careful on what you choose and how you structure your trade.

Though we trade earnings, speculative as well as directional trades, our main focus is on Income, aim for generating single digit gains on overall portfolio month after month, consistently. These type of speculative trades are used just as an accelerator but are NOT counted in OP Income Newsletter portfolio results. If you would like to join OPNewsletter, pls click here to sign-up for the waitlist.

Happy hunting,
Profitable Trading, OP

One Comment

Leave a Reply

Facebook IconYouTube IconTwitter IconFollow Me on Instagram