OptionPundit

Tag: Iron Condor

  • Earnings preview Apple AAPL

    Apple (AAPL) is set to report its highly anticipated June results today i.e. July 24, after the market close. Besides Google (GOOG), Apple (AAPL) is another popular stock with option tarders to play earnings.

    What to Expect: According to briefing.com, here is what traders are expecting:

    The Street expects Q3 EPS to grow 33% year-over-year to $10.38 and revenues to grow 31% YoY to $37.43 bln. Not surprisingly, the Street estimates are above the company’s typically conservative guidance of EPS of $8.68 and revenues of ~$34 bln issued on the Q2 release (April). Yet the Street has set relatively low expectations with some analysts even anticipating a Q3 miss.

    Another expectation element is around iPhone5/ iPade sales. You may find information on that anywhere on the web so I won’t go into those anticipations.

    Options Take:

    AAPL IV SKEW

    This quarter IV rise prior to earnings is not as dramatic as it was during the last quarter when VIX equivalent IV of AAPL was at around 50. (Don’t trade AAPL earnings without reading this first).  The IV skew between Jul weekly options (expires this week) and Aug options is about 25%. Which is higher vs last quarter. Bottomline, premiums are elevated but not as much as it was during the last quarter and based on ATM implied volatility, options are pricing a $26+/- move and based on last quoted prices, a $605 (nearest ATM) weeklies’ straddle can be sold for $32.40 credit. Based on the past 4 quarters, AAPL has moved 8-10% during the last 2 quarters and about 3-5% during Jul/Oct 2011 quarters.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    Technical Take

    AAPL Daily Price Chart

    AAPL is again trending upwards with 20dma as support. 50dma is 579.54 and 200 days moving support is 502.33. All time high for AAPL was $644. So it seems that a range play between 550 and 650 could be a good one to trade. And in the most likely scenario either of the trend line will be broken which will set the stage for post-earning move. In the extreme highly unlikely scenario (remember CMG), the stock may move to $680 and $535.

    How to Trade:
    There are various ways to play earnings. One of the easiest trade is via option straddle or strangle. If you are a buyer, you risk is if stock doesn’t move big (uncertain) and Implied Volatility crash (Certain). If you are a straddle/strangle seller your biggest risk is stock move (uncertain) beyond your breakeven point (recall CMG). If you are fine with the probable range, an Iron Condor strategy could also provide a good solution. If you are an option trader, here are several ways on how you can trade google earnings with a good risk/reward ratio. If your outlook is that stock won’t move, you can also trade earnings via calendars spreads. However if you think stock will sure move, Reverse Iron Condor and/or selling Butterfly could result in nice gains too. Every strategy has its own pros-n-cons choose what you like based on your risk/reward preference.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    WHY DOES IT MATTER:
    Apple (AAPL) earning event is one of the events that can provide some exceptional gains in a very short period of time. CMG recently demonstrated the exceptional gains possiblity that are associated with earning events.

    WATCH-OUT:
    Keep in mind that earnings are always a 50/50 probability event and stocks can move in a much wider range than implied by either option market or forecast by charts.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    Trade carefully, Trade profitably, OP

  • 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-

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  • 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.

  • Ms Vega is Here to Stay

    Pls allow me introduce you to Ms Vega.

    Ms Vega is my personification for Implied Volatility.  As of this writing, there is almost 3% IV difference for SPY ATM options, VIX is at 24, VIX Oct futures are at 30, a 25% difference!! Though nothing is certain in the markets, this skew does indicate that market participants are “unusually uncertain”.

    Stock markets are an interesting place as Market participants tend to have a short memory. With a few percent market rally, bears turn into bull and vice versa and most often the reason is “when the facts change, I change too, what do you do sir”?

    A lot of technical chartists have turned bullish, Dow Theorist Mr Richard Russell has indicated that both Dow Industrial and Dow Transports have indicated bullish signal by closing above June high. Mr Russell also gave dire warnings and suggested members to tell friends that hard rain is coming, they sell everything and that by the end of this year they won’t recognize America as it appeared to him that it was one of the most predictable and dire market top. Don’t get me wrong, my intentions are not to disrespecting anyone here, but the point I am making is that Mr Market can humble anyone, anytime. Now just because Dow and Transports bettered June High, doesn’t mean we are in a primary Bull market, both of these needs to prove by crossing their April high first before anything meaningful can be concluded, else we are stuck in this sideways zone.

    One of my favorite thinker is John Hussman. He doesn’t like what he sees from the economic fundamental perspective. Once ISM Purchasing Manager’s index data drops below 54, it is highly likely that we are about to see double dip. Pls click here to read in details. Another thinker, Bond King, Bill Gross of PIMCO thinks that world is lacking in “aggregate demand” and has not yet adjusted to the new normal. His latest investment outlook discusses the impact that slowing world population will have in the “new normal” environment.

    PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of the electronic eye – waiting for the flush, waiting for the flush, waiting for the flush, with very little success. Try another way, Washington. El-Erian, Sachs and other 21st century policy thinkers have a better way to push the handle.

    Pls click here to read the full outlook.

    We are in a range 11,250 and 9,600. Unless any of those are gone, we are in a range. We may expect sudden burst of euphoria or panic sell-off but nothing is really being achieved. For option traders, this can be a good thing depending upon how one uses it and what sort of risk management strategy is used. There are lot of option trading strategies that can be used for sideways markets including the most widely followed Iron Condor strategy. Calendars can be tricky unless chose carefully. Though the strategies that worked in traditional markets may not work so well and returns may not be spectacular but I think Option Traders are still probably better placed to benefit from this sideways move.

    (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)

    Until then, keep trading the options way and start to love as I call Mr. Theta and Ms Vega.

    Profitable Trading, OP

  • 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

  • OPNewsletter May +18%, June +5.3% (Open)

    Another turbulent and volatile period! Last week started with a huge gap up rally after EU announced a $1trillion bailout package but by weekend it was a different story. Now there are questions on how solid it was. The confidence barometer, Euro, is now 4 years low and maybe even headed for $ parity as I wonder if EU will really step in to avoid Euro slide.  They should be pretty excited as EU economy may get much needed push with a weaker Euro. For OPNewsletter, we are 77% in cash. Remainder of the cash is invested across 3 income portfolio and we are nicely up +5.3% for June 2010.

    May 2010 was a record month for OPNewsletter. Since the beginning of Phase-2 of OPNewsletter in Jan 2008, this was the highest % gainer. We achieved +18% gains in May 2010. This is coming on the heels of 9.7% in April 2010. We also avoided market meltdown by going into cash before pullback really started hitting hard. These results don’t include returns on speculative trades like VIX (a few times), Google, ISRG, SLGN, and many more. Euro slide didn’t come as much of surprise too, as we had started anticipating this move when 50days EMA crossed the 200EMA for the first time in 18months.

    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.

    I have been covering market commentary on both OPDiscussion forum as well as on Twitter. Congratulations to all those who benefited.

    If I could make a suggestion, [b]pls don’t over trade this coming week[/b]; keep it simple and watch the show…just watch out for the two levels I mentioned ([b]Dow 10,300 and 10,700[/b]).

    There were a few trade ideas I shared in the Weekly OPN portfolio tracking; Look out for Silver (CEF, SLV). I think silver’s time is coming soon (how soon, I don’t know). Silver maybe more volatile then gold so you gotta be careful.  As usual pls do your due diligence before investing any single $$ into any stocks I/OP mention anywhere. Regarding Gold, congratulations to all those who have been permabull on this, it hit a new record high (but not quite high yet if adjusted for inflation). If you have sometime, pls do read the this link . This is a post I wrote in 2007 which I hope will provide a historical perspective of how far have we come since then.

    50DMA StocksFrom Market perspective, Internals don’t look attractive and it seems that this pull back still has a course to run. Whether this is a full blown Market Top or just a healthy correction in the on-going primary uptrend, we’ll know only in the Hindsight.

    Look at the attached chart of NYSE stocks that are trading above 50days moving average. The lows are getting lower, in fact recent correction had the lowest % of stocks trading above 50days MA in the last 1 year; including all the three pullbacks. The distribution days are increasing and 90% down days are also increasing which doesn’t paint a healthy picture.

    Here is what one industry veteran (Mr Richard Russell of Famed Dow Theory has to say) –

    Russell suggestion — Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.

    He is of the view that one should monitor the two Averages ($DJI and $DJT) hit “spear point” lows, Industrials at 10380.43, Transports at 4298.12 and he considers these to be of extremely importance. If both Averages hold above their May 7 lows, it will be a bullish indication; If both Averages turn down, and one Average violates its May 7 low but the other refuses to confirm, that could be a very bullish sign; If both Averages break below their May 7 lows, it will be a very bearish action, and could predict a crash (the two Averages do not have to break on the same day, but the closer in time they both violate the May 7 lows, the more authoritative and bearish the action).

    Besides a 10,300 level that one should be careful about, I think hard rain is not coming until the averages drops below following levels-  Industrial at 9,835, Transports at 3,740. Though I am not an expert on Dow Theory, I would stay clear if Dow drops below $10,300 and will reposition to re-enter around 9,835 but with risk management plans in place, in case Markets drops further. If However, Dow manages to remain above 10,700, I think we might have run this pullback course; at least for now.

    Thank you all the positive feedback on “Financial Freedom” article. I am glad you liked it and that it could add some value to your existing knowledge. 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.

    Trade Carefully, Trade Profitable, OP