Credit Strategies For Earnings

[Music] hey everyone welcome back to the show my name is Mike this is my whiteboard and today we're going to talk about earning strategies so we're gonna look at three credit strategies for earnings so if you are actually it it's said submitted this email and asked me to cover these three specific strategies so that's exactly what we're gonna do today so we're gonna be looking at the iron Condor we're gonna compare it to the chicken iron Condor and also we're gonna look at the Jade lizard and we're gonna look at different scenarios and see why we might use one over the other so let's dive right into it and we'll look at the first scenario and we're gonna look at each of these three and we're gonna discuss why we might look at each of these so the very first one is going to be an iron Condor and for me personally I would say if I'm going to deploy a regular iron Condor in earnings it's probably if I'm a beginner or if I want to see what would happen with an earnings announcement maybe how the option prices are affected after the earnings announcement as we know with earnings there is an implied volatility spike usually and normally after the earnings announcement when the unknown becomes known the volatility tends to contract so we call that a Valk the option prices are actually going to be reflective of that implied volatility so again implied volatility is just looking at the option prices so if implied volatility is high that means that the option prices are higher so if I can sell premium up here and then after the earnings announcement now that everyone knows what had happened the volatility is usually going to decrease which can result in profit if I'm selling premium up here and buying it back down here so for an iron Condor I'm usually going to look at maybe a beginner strategy and you'll see why on the next slide but let's like take a look at the chicken iron Condor so the chicken iron Condor is something I'm going to do for maybe larger underlying so it usually works best for large underlyings and it gives me some protection in a certain way that we're going to cover and lastly we're going to look at the Jade lizard and for me this is an opportunity to get long with the Jade lizard there is a difference between the Jade lizard and these two strategies up here which we'll cover on the last slide but first let's dig deep into the iron Condor on the next slide here and we'll talk about basically the max profit max loss break-even point and we'll give you a good gauge of earnings and what is expected of earnings so yesterday we talked about expected move during earnings so we talked about calculating the expected move in a general setting but also looking at the market maker move on thinkorswim and also in the dough platform and using that value to determine what the market is expecting what sort of move the market is expecting out of this underlying so let's say there is an expected earnings move of 10 points so plus or minus 10 points and if you have it enabled on the dough trade page which is very easy to do you can just pull up the trade page andö click on settings in the lower left and then click on the bullet point that allows you to enable that expected move for earnings and you'll see an orange bar appear here so basically if I know that I have a 10 point earnings expected move you're gonna see the orange bar add 10 points to the upside and also add 10 points to the downside so in this example we're looking at a high Ivy environment where we've got an earnings expected move of 10 points with the underlying trading at 75 so let's say I can deploy a regular iron Condor where I'm looking to collect one-third the width of the spread and I've got a three point wide spread here so let's say I'm able to actually completely cover the expected move and more so in this example the expected move would bring us to 85 on the upside which is just adding 10 points to 75 and then it would bring us down to 65 on the downside so let's say I can throw on a 90 93 call spread sell that and then sell these 60 57 put spread for a total credit of $1.00 even so I'm collecting 1/3 the width of the spread since both of these spreads are three points wide my max loss is going to be $200 because if I'm collecting $100 even if the stock price goes all the way through my call spread or all the way through my put spread out to buy one of those spreads back for $3 at expiration again only one side of these can be prop can be a loser a stock can't go through the put side and the call side at the same time so I would only have to close out one of those spreads for a full loser if I did have to do that but since I collected $1.00 in profit I can offset that max loss which brings it down to two dollars as opposed to three dollars now if we look at our breakevens since we're collecting premium and as for all premium collecting strategies our breakevens are going to be benefited so if I'm collecting a dollar all I need to do to determine my breakeven is add a dollar to the upside here so from 90 to 91 and subtract a dollar from the downside so go from 60 to 59 so my break evens here are going to be 59 point zero zero in 91 point zero zero if I have to buy back the short call at 91 and let's say I have to buy back the put at 59 I'm gonna have a one point of intrinsic value there so if I collected a profit or a premium of $1.00 and I have to buy it back from $1.00 at expiration that's going to give me that breakeven price so that's how I'm determining that breakeven value so for this trade specifically it's going to have a high probability of success as you can see we're covering the expected move and more so even if the stock price does go up to 85 or down to 65 we still would have options that are out of the money and usually when we're deploying earning strategies we're looking at using the closest expiring options that contain that earnings announcement so if there was an earnings announcement today I would use the expiry for tomorrow so I would only have one day to go on that expiration and that is what's going to give us the benefit of executing this strategy because even if the stock price does go up 10 points I would still be out of the money on the call side and my put side would be way out of the money as well so I would usually be able to close that for a pretty nice winner there so for iron condors I said I would say that I would be looking at maybe a beginning trade maybe if I've never trade to earnings before I want to probably stay with to find risk but maybe if I don't have an assumption as to where the stocks going to go then I would maybe deploy an iron condor and that's why I've marked it for beginner now let's take a look at the next slide and we'll look at the chicken iron Condor so the chicken iron Condor is a really interesting trade and one of my favorites for earnings overall so a chicken iron Condor is basically setting up an iron Condor where we're not collecting one-third the width of the strikes we're trying to collect 40 to 50% of the width of the strikes so let's say we've got a strategy set up here in a large underlying so normally when implied volatility is higher this strategy usually works better for larger underlyings because we're able to collect more of that width of the spread easier so in this example you'll see that I've actually moved my short strikes into the expected move so let's say the expected moves is 50 points here so we've got an underlying trading at 500 and I've got a 545 short call and a 455 short put and then 10 points out I've purchased the 555 call and 10 points to the downside I purchased the 445 put so I've got a 10 point wide chicken iron Condor with the short options a little bit inside that expected move as you see here so normally we can collect about 50% of the width of the spread in a situation like this sometimes we are lucky enough to bring that call just outside or just at the expected move which is the optimal situation in this example but I wanted to highlight that we can still do this because of the fact that it's going to give me my breakeven right at that expected move so if my Mac profit let's say I collected a $5 credit for this 10 point wide chicken iron Condor I'm collecting 50% of the width of the spread so it can it's basically aligns with the chicken iron Condor mindset so my max profit is $5 or $500 and that's if the stock price stays within my short strikes at expiration and my max loss is $500 as well so the big takeaway for this strategy is that with larger underlying specifically we normally would see those massive moves we're not really going to see a massive move in an underlying that's may be trading for $50 or $60 usually the larger more magnified moves are the ones we see in those 500 600 $700 underlyings so what this does is it gives us blowout protection so when I say blowout protection I'm only 45 points away from the stock price and the expected move is 50 points so if the stock price ends up going up a hundred points it gives me more blowout protection than if I were to have traded a regular iron Condor sure my regular iron Condor I can probably get further away but I would be collecting less and therefore my max loss would be higher so in this same example if I move these strikes out for a regular iron Condor and only collected $3 which would be a third of the width of the spread I would be at a max loss of $700 if I was to get blown out on one side so the break evens as you can see since I'm collecting $5 you just add the $5 to the call side up here from 545 that brings us to 550 and on the downside you would just subtract that premium from the put so the 455 put subtract $5 that brings you to the 450 value so another interesting thing about this strategy is it not only gives us blowout protection but if we're correct and this stock price doesn't move or it just moves a little bit we're going to get paid because we're going to be collecting a lot more premium we're collecting about half the width of the spread in this example so if the stock price doesn't move an implied volatility deflates rapidly we're going to see a lot of that profit realized the very next day or maybe a couple days after so this is an what these are the two reasons why I like the strategy the best number one it gives me blowout protection if I'm wrong and lets me lose less than if I were to have deployed a regular iron Condor and if I'm correct and the stock price stays within the expected range or expected move of that earnings announcement then I'm going to get paid more than if I were to have just deployed a regular iron Condor so let's look at the last example which is the Jade lizard here so we've got a Jade lizard which again is just selling a put and selling a call spread against that so let's say we've got an underlying trading at 70 and an expected move of about 10 percent of that underlying so 7 points to the upside or downside and let's say I collected a dollar five credit which meets the criteria for a Jade lizard since in this example my call spread is one point wide so with Jade lizards we always want to collect more than the width of our call spread to ensure that we don't have risk to the upside so if the stock price ends up blowing through this call spread here I would still be at a profit of five cents because even though I would have to buy back in this call spread for one dollar I collected a dollar five originally so I would be able to offset that one dollar loss by my dollar credit here and then have five cents left over but the goal is for the stock price to stay in this range so if that happens my max profit would be 105 which is just the credit that I received and this is where the difference comes into play since I've got a jade lizard I don't have defined risk on the downside so for me this would be an opportunity to get long if I'm wrong so instead of purchasing the stock outright I wouldn't be at a break-even of sixty ninety five so really all I'm doing there is just taking the sixty to strike subtracting my max profit of a dollar five which brings me to the sixty ninety five breakeven which is six thousand ninety five dollars if the stock price goes to zero that would be my max loss but when we compare getting along the stock at 70 which would give me a cost basis of seven thousand dollars and giving me a cost basis of sixty ninety five if I were to be assigned because really if the stock price goes down to sixty or 59 my cost basis is at sixty ninety five and I would just be long shares down there so I would have almost ten points of extra value that I could gain as opposed to just buying the shares outright so for a Jade lizard this would be an opportunity for me to get long if I'm wrong so let's wrap all these up with some takeaways here for you so the first takeaway is that ernie's can provide high environments sometimes they don't sometimes they do sometimes they really really do and in a lot of situations we'll see a high implied volatility and then right after the earnings announcement will see that volatility collapse so that's why you always see or mostly always see us deploying the credit strategies where we're collecting premium around earnings secondly credit strategies take advantage of this so when you compare a credit strategy to a debit strategy if I'm buying an option and the implied volatility decreases that's going to hurt my position so more often than not almost always you'll see us deploying credit strategies whether they're defined risk or naked premium and lastly there are different strategies for different scenarios so as you saw in these three examples we've got strategies for getting long if we want to get long the stock we've got strategies for larger underlyings and we've got strategies for people that are just getting their feet wet with earnings experiences so really it's determining what you want to do what you're comfortable with whether you like to find risk or undefined risk and going from there so thanks for tuning in this has been the three credit strategies for earnings from my point of view if you've got any questions at all shoot me an email at support at dot-com or support at tastytrade.com or you can tweet me at dough trader Mike but stay tuned next we've got Jim Schultz from theory to practice you

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Views: 49,011

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Keywords: credit strategies for earnings, options trading, stock market, how to trade options, options, learn to trade, investing, stock trading, options strategies, options trading for beginners, tastytrade, iron condor, chicken iron condor, jade lizard

Id: VEWQAmjGIo8

Length: 14min 58sec (898 seconds)

Published: Mon Aug 28 2017