An Options Strategy That Can Return 100% Overnight

so the style of options trading that we practice on our options trading desk here at SMB capital is known as options income trading and for the most part our traders are involved in longer term trades that typically lasts between 30 and 60 days however that's a pretty long time horizon for many traders and so I often get asked the question what would be a way to get that timeframe down to one or two days and still have the opportunity to earn really superior returns so one way that this can be done is through setting up option strategies that are designed to start the day before a company releases its earnings and wrap that same trade up the next morning after the earnings have been released the strategy that I'll be showing you today has one great component and that is that you don't need to predict the direction that a stock will take after earnings whether the market loves or hates the earnings releases immaterial to us instead we're focusing on another issue which has to do with hobby options market is actually predicting the move the stock will make in either direction after the earnings are released this is a powerful technique and can yield incredible returns in the right circumstances and you are in and out of the trade in less than 24 hours so if you're interested in an options trading strategy where you can get in and out of the trade in less than a day and in some cases earn a profit of more than 100% of your initial investment then I think you're going to be interested in this video so stick around [Music] hi I'm Seth Froy burger and I'm the head trader of SMB capitals options trading desk SMB capital is a proprietary trading firm located in midtown Manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in New York City you want to click our subscribe button right now so that you don't miss any of our free trading videos produced for the trading and investing community now in this video we're going to be reviewing an option strategy known as the Iron Butterfly and we're going to be applying that strategy to a very specific time period the day before earnings are released and the day right after earnings are released because of the way that options change value around earnings releases the returns in some cases going to be spectacular particularly if you do some work to identify trades that are more likely than not to be successful I think you'll find this approach to options trading pretty eye-opening because of the return potential and how quickly those returns can be earned and while we're talking about option strategies if you'd like to learn three more real-world option strategies that our traders use including the simple and powerful strategy that some of the greatest investors in the world like Warren Buffett used all the time plus an options trading strategy that has a statistical 80 percent probability of profit month-in and month-out plus an option strategy that you can employ with the stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down a small percentage then you should check out the free options class that we're currently running just go ahead and click the link that should be appearing right now at the top right corner of your screen that will open the free registration page in a new window so don't worry you won't lose this video you can also visit options class com to register for this free intensive workshop it's a rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it ok so let's jump in so let's think about what happens when a company releases its earnings in most cases as almost all of you know the earnings release is almost always accompanied by a large move which is essentially the market's reaction to that earnings release and the accompanying company commentary while the options market is basically the place where the market makes its bets about the likely magnitude of a move that will follow a company releasing its earning report well the market makers who set the pricing for the calls and the puts puts they've got to build enough price into the options to be able to absorb a big move in a stock and still make money on the option this is particularly true of the options that are at the same price that the market is trading which in the options world is known as the act the money options why because if there's going to be a large move on a stock in either direction and you don't know which direction that will be then you had better beef up your price before earnings particularly the at the money put and the at the money call options because one thing is almost a certainty the stock will take off in one direction or the other and you need to have collected enough premium to absorb that move and still make a profit so let's show an example that will bring all this into focus so here's the stock and by the way this is a real stock this is a real historical example but I don't want you to get focused on this particular stock I want you to understand the principles at work so that you can apply these same principles to any stock that you'd like to trade so here's a stock that was trading at around 1870 on this day now I want you to focus on the at the money call and the act of money put on these options which happened to be expiring the next day now if you buy in at the money call and then at the money put at the same time that position is called a long straddle and in this case which is just a normal week for the stock the straddle for the stock is priced that's simply the sum of the price of the at the money call plus the price of the at the money put and that makes sense because the two together make up the at the money straddle so in this case the two combined yield a price of 23 dollars and 42 cents now let's take a look at that exact same stock 15 minutes before the market closed on the trading day just prior to the earnings being released for the stock and that's just a few weeks later than that last example now I want you to focus on the cost of the at the money call and put in other words this straddle price on that day on this stock which is now trading at 1740 you'll see that this the straddle price is now skyrocketed the at the money call is up to 49 47 and the at the money put is up to 40 809 so the total straddle price is $97 and 56 cents in the normal week that we just showed you previous to this the cost was less than 25% of that 23:42 and this makes sense of course because the next morning this 1740 stock is going to most likely make it very large move earnings are coming and the market makers need a lot of premium to absorb that move because either the at the money call or the at the money put the next morning are going to be deep in the money so they need to be collecting enough money from both bets the call buyers and the put buyers so they'll be able to absorb that hit and make money so with all that as an introduction now let's talk about the Iron Butterfly the Iron Butterfly is basically a short straddle where we sell the at the money call and we sell the at the money put at the same place in this case at the market price of the stock and then we by what are called wings which are a protective long call and a protective long put to protect the position if the market moves too far in either direction now let's take a look at an Iron Butterfly that we could have put on the day before earnings on this stock where we are shortly at the money call and we're short the at the money put you also see that we are long they call 60 points above the market and long the put 60 points below the market this entire combination of short and long options is known as an Iron Butterfly now if you do the math you realize that if you add up the cost of the long options you're buying and the income you'll receive from the short options you're selling you're actually ending up with a credit of five thousand two hundred seventy eight dollars so that cash will go into your account the day you did this transaction now for reasons I can explain another time having with the way that your broker will treat this transaction the worst case scenario for this trade in other words the capital you have in the trade is actually 722 dollars now let's fast forward the next day after earnings have been released which is also the final trading day for these options now let's break this down option by option now and you're gonna learn a lot about what happens to options pricing after earnings have been released now in this case the market was happy with the earnings release and by 10:30 in the next morning the stock was already up 55 bucks to 1792 so now with about five and a half trading hours left let's take a look at the pricing of each of the options comprising the Iron Butterfly now the protective call at the top which incidentally we pay two to twenty two dollars and 18 cents for even though the stock is soaring the price of that option has dropped to 921 that's because the news is out there's only about five hours left for the market to further rally to 1800 remember the news is already out at this point so there's no mystery as to how the company did that quarter now let's focus very importantly on the short call at 1740 now that option which we were paid forty nine dollars and forty seven cents for originally that's risen to fifty to fifty which you'd expect because the stock is up so much you would have to expect that call which is now so deep in the money would increase in value to some extent and since we're short that call that's not good for us okay so we're down money on both the long call and the short call now let's focus on the put side originally we were paid 48 dollars and nine cents for that put well now it's worth fifty eight cents why because the market has rallied so much up to 1792 and there's less than a day left for the stock to drop back down 52 points and give that put option at 1740 any value at all so that's a huge profit we've got on that put right now and then finally the 1680 protective put well that's dropped to near worthless at 53 cents so when you do the math by 10:30 the next morning here's the scorecard of what you need to pay to actually reverse the original tray and therefore close the entire position as you can see if you add to our original credit of 52 78 the credit we get for selling the long call and selling the long put and then subtract out from that the cost of buying back the short call and buying back the short put we're left with a profit of nine hundred seventy four dollars by 10:30 in the morning remember now I told you that your broker would require seven hundred twenty two dollars of capital for this transaction so that comes out to a return of a little over one hundred thirty percent by the next morning which is not a bad payday and incidentally if you had waited another hour the return actually would have been closer to three hundred percent but we'll take one hundred thirty percent return in about two trading hours now obviously the market reaction could have been much stronger in which case if the stock moved too far in one direction or other there is the possibility of your having a loss so you obviously don't want to take a trade like this with a large portion of your capital this should always be a small trade because of the lost potential incidentally there are tools that are available for identifying stocks where there's a tendency for the market to overestimate the likely move of that particular stock after earnings by looking back at the last two to three years of earnings releases for that stock so for instance if over the last three years the options market overestimated the move of a stock by eighty percent as measured by the price of the at the money straddle the day before earnings you might want to take a look at this strategy for that stock for again a small amount of capital so what is the major takeaway from this example we've shown you today the major lesson from today's video is the dramatic change that occurs in options pricing right before and after earnings since the prices are pumped up so substantially right before earnings if you're short those pumped up options protected of course by long options farther away with the right stocks there's money to be made if the stocks post earnings move is a little less forceful than the option market had priced in with the right candidates this is a professional trade that has potential just to remind you as I said earlier if you enjoyed this video and you'd like to learn more real-world strategies like a simple and powerful strategy that some of the greatest investors in the world like Warren Buffett use all the time plus an options trading strategy that has a statistical 80 percent probability of profit month in and month out plus an option strategy that you can employ with the stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down a small percentage then you should check out the free options class that we're currently running just go ahead and click the link that should be appearing now at the top right hand corner of the screen that will open the free registration page in a new window so you won't lose this video it's an extremely rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it and one more thing I'd like you to do is go ahead and click our subscribe button so you don't miss any of our trading videos produced for the trading and investment community and while you're at it add some feedback to the comments section for what videos you'd like to see us produce in the future so from all of us at SMB trade well

Channel: SMB Capital

Views: 127,752

Rating: 4.8894601 out of 5

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, iron butterfly

Id: WYya6HGDYYg

Length: 13min 55sec (835 seconds)

Published: Wed Jul 03 2019