Web’s Weekly RoundupComparison of Option Strategies for Earnings
June 13, 2015
Presenter: Web Begole
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Web’s Weekly Roundup
• Analysis of /ES (S&P 500 Futures) and forecast
• Analysis of /VX (S&P 500 Volatility Index Futures) and forecast
• Analysis of /DX (US Dollar Futures) and forecast
• Analysis of /ZB (30-Year Bond Futures) and forecast
• Comparison of Defined Risk Option Strategies for Earnings – as well as some tangential
musings
/ES Futures (S&P 500) YTD 2015
4
Opening Price: 2038.25Current Price: 2084.50
High: 2125Low: 1953.5
O/C Change: +46.25pts (+2.22%)H/L Range: 171.50
Notable Pattern:Rotated into September contract, adjusting the webs. The compression of venom lines above means new highs above 2118 will be difficult.
Forecast:As we have touched the bottom of value for the month here, I expect support and a test of the 2118 area. Failing that look for down-move to 2052.
/VX Futures (S&P Volatility Index Futures) YTD 2015
5
Opening Price: 23.35Current Price: 14.21
High: 29.85Low: 13.40
O/C Change: -9.14pts (-39.14%)H/L Range: 16.45
Notable Pattern:Trending down since February with all value areas gapping lower until May->June. Also notice the tight venom lines below June’s value.
Forecast:I expect upward movement to be restricted to 16.5 but with the /ES expected to go higher I expect the /VX to stay in the 13.5-15 range.
/DX Futures (USDollar Index) YTD 2015
6
Opening Price: 92.005Current Price: 95.195
High: 101.23Low: 91.995
O/C Change: +3.19pts (+3.35%)H/L Range: 9.235pts
Notable Pattern:As mentioned last week, the upward breakout from value was false.
Forecast:I believe we continue to see weakness in the dollar coming with a downside target this month of 93.825 and upside resistance maintaining at 96.395.
/ZB Futures (30-Year Bonds) YTD 2015
7
Opening Price: 157’21Current Price: 150’11
High: 165’11Low: 147’16
O/C Change: -7’10H/L Range: 17’27
Notable Pattern:Have fallen through value for the month of June and finding the bottom of value a significant resistance point.
Forecast:I believe we continue to see weakness towards 144’08 in the extreme. If the bonds break into value look for 154’21.
Looking Ahead
• Overall:
• Notably, the S&P 500 hardly moved from open to close for the week (opened at 2083,
closed at 2084.5, only a +1.50 point difference…..)
• Greek news continued to be the volatility catalyst throughout the week, up and down.
• Next week will be Quadruple Witching with the June S&P Futures, Equity Monthly
Options, Futures Options all expiring in addition to FOMC announcement.
(ie: Grab your popcorn cause it might be better to just watch from the sidelines!)
• Only thing I’m seeing as a definite probability is further declines in the USDollar which
could be spurned by some kind of definite action in Europe… maybe.
A Comparison ofDefined Risk
Option StrategiesFor Earnings
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Defined Risk Option Strategies For Earnings
• Defined Risk Option Strategies for Earnings• Criteria: All strategies have a defined risk if the trade is wrong AND all strategies have a higher reward potential than the risk
involved.
• Naked OptionMax Risk: Cost of OptionMax Reward: “Unlimited“ ($1 per dollar in the money the option becomes MINUS the cost of the option)
• Debit Spread Max Risk: Cost of SpreadMax Reward: Distance between strikes MINUS cost of spread
• ButterflyMax Risk: Cost of SpreadMax Reward: Width of the Butterfly MINUS cost of the spread
• Iron ButterflyMax Risk: Width of the Iron Butterfly MINUS the credit received for selling itMax Reward: The credit received for selling it
• Limited Risk ReversalMax Risk: Width of the Credit Spread +credit/-debit for entering the tradeMax Reward: Unlimited ($1 per dollar in the money the naked option becomes MINUS the value of the credit spread)
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Defined Risk Option Strategies For Earnings
• For today’s discussion we’re going to use Restoration Hardware (RH) which had earnings after the bell this week on Thursday.
• With James Ramelli out of the office, I was moderating the room around earnings time (late afternoon) and the room wanted to look at RH for earnings.
• Because RH does not have weekly options, and the monthly options are 5-dollar wide strikes, this is not the kind of stock James would typically look to play for earnings. - Typically we only want weekly options, and preferably we want dollar wide or .50 wide strikes.
• This aspect makes RH harder to play for earnings than other stocks and harder to choose the optimal strategy. But I played it.
• Something to remember: – Statistically, a stock that closes higher the trading day after earnings relative to the close before
earnings will continue to move higher for ~3 trading days. – Because it has monthly options instead of weekly, the “measured move” will not be as focused on
earnings as weekly options expiring closer to earnings would be. (Because implied volatility is including extra days)
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Defined Risk Option Strategies For Earnings
• Using Restoration Hardware from this week, let’s look at how the strategies could be established
Thursday June 11, RH closes the day trading at 94.83 with an expected move by June 19th of +/-6.643Upside target ~101.50 Downside target ~88 No weeklies, just Monthlies expiring next week. Strikes WIDE.I am expecting RH to rally, so I want to target the long-side.
• Naked Option – Buy the 95 Call for $3.60Max Risk: $360Max Reward: Unlimited above 98.60Breakeven: 98.60
• Debit Spread – Buy the 95 Call, Sell the 100 Call for $1.95Max Risk: $195Max Reward: $305Breakeven: 96.95
• Butterfly – Sell 2x 100 Calls, Buy the 95 Call, Buy the 105 Call for $0.85Max Risk: $85Max Reward: $415Breakevens: 95.85 & 104.15
• Iron Butterfly – Sell 95 Call & 95 Put, Buy the 100 Call and 90 Put for $4.00 creditMax Risk: $100Max Reward: $400Breakevens: 91 & 99
• Limited Risk Reversal – Sell the 100 Put, Buy the 95 Put, Buy the 95 Callfor $0.55Max Risk: $555Max Reward: Unlimited above 97.55Breakeven: 97.55 12
Call Mark Strike Put Mark
14.55 80 0.12
10.30 85 0.50
6.55 90 1.60
3.60 95 3.65
1.65 100 6.70
0.55 105 10.65
0.15 110 15.55
June 2015 Option Chain (Thurs)
Defined Risk Option Strategies For Earnings
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RH PriceAT EXPIRATION
95 Call Naked 95/100 Call Spread
95/100/105 Call Butterfly
90/95/100 Iron Butterfly
95/100|95CLimited Risk Reversal
RISK: $360 $195 $85 $100 $555
89 -$360 -$195 -$85 -$100 -$555
90 -$360 -$195 -$85 -$100 -$555
91 -$360 -$195 -$85 $0 -$555
92 -$360 -$195 -$85 $100 -$555
93 -$360 -$195 -$85 $200 -$555
94 -$360 -$195 -$85 $300 -$555
95 -$360 -$195 -$85 $400 -$555
96 -$260 -$100 $15 $300 -$355
97 -$160 $5 $115 $200 -$155
98 -$60 $105 $215 $100 $45
99 $40 $205 $315 $0 $245
100 $140 $305 $415 -$100 $445
101 $240 $305 $315 -$100 $545
102 $340 $305 $215 -$100 $645
103 $440 $305 $115 -$100 $745
104 $540 $305 $15 -$100 $845
105 $640 $305 -$85 -$100 $945
106 $740 $305 -$85 -$100 $1045
Defined Risk Option Strategies For Earnings
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RH PriceFriday 6/12RH closes at 96.22
95 Call Naked 95/100 Call Spread
95/100/105 Call Butterfly
90/95/100 Iron Butterfly
95/100|95CLimited Risk Reversal
RISK: $360 $195 $85 $100 $555
96 -$145 -$15 $67.50 $112.50 -$165
Call Mark Strike Put Mark
15.90 80 0.02
11.05 85 0.02
6.35 90 0.15
2.15 95 0.95
0.35 100 4.20
0.07 105 8.40
0.02 110 13.40
June 2015 Option Chain (Fri)There is still a week before the expiration,so lets see how these strategies faired atthe end of the next day. RH Closes at 96.22 (up 1.40ish)
There are five more trading days to go…
Defined Risk Option Strategies For Earnings
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RH PriceAT EXP
95 Call Naked
95/100 Call Spread
2x95/100 Call Spread
95/100|95CLimited Risk Reversal
RISK: $360 $195 $555 $555
89 -$360 -$195 -$555 -$555
90 -$360 -$195 -$555 -$555
91 -$360 -$195 -$555 -$555
92 -$360 -$195 -$555 -$555
93 -$360 -$195 -$555 -$555
94 -$360 -$195 -$555 -$555
95 -$360 -$195 -$555 -$555
96 -$260 -$100 -$355 -$355
97 -$160 $5 -$155 -$155
98 -$60 $105 $45 $45
99 $40 $205 $245 $245
100 $140 $305 $445 $445
101 $240 $305 $545 $545
102 $340 $305 $645 $645
103 $440 $305 $745 $745
104 $540 $305 $845 $845
105 $640 $305 $945 $945
106 $740 $305 $1045 $1045
Some musings:In putting this chart together,I noticed the Naked Call combined with the debit vertical gave me the samerisk/reward as the Limited Risk Reversal.So why not do that?
This would be buying 2x the 95 Calls and selling 1 of the 100 Calls for a net debitof $555The profit loss graph is exactly the same as the limited risk reversal…
Honestly, no reason to do one over the otherunless you have an aversion to puts.
RH PriceFriday 6/12RH closes at 96.22
95 Call Naked + 95/100 Call Spread
95/100|95CLimited Risk Reversal
RISK: $555 $555
96 -$160 -$165
Defined Risk Option Strategies For Earnings
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Some musings:Another question I often get is about thereverse… selling a call credit spread to buy a call
So in this case it would be selling 1x the 95 call and buying 2x of the 100 calls. Net credit of this trade would be $0.30
Max Reward: UnlimitedMax Risk: $470Breakevens: 95.30 & 104.70
There’s a reason I don’t particularly like this idea….(Remember the expected upside move is ~101)
RH PriceAT EXPIRATION
Back Ratio95/100 Spread
95/100|95CLimited Risk Reversal
RISK: $470 $555
89 $30 -$555
90 $30 -$555
91 $30 -$555
92 $30 -$555
93 $30 -$555
94 $30 -$555
95 $30 -$555
96 -$70 -$355
97 -$170 -$155
98 -$270 $45
99 -$370 $245
100 -$470 $445
101 -$370 $545
102 -$270 $645
103 -$170 $745
104 -$70 $845
105 $30 $945
106 $130 $1045
Defined Risk Option Strategies For Earnings
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Some musings:Then of course maybe you’re asking yourself…. What about the other back ratio? Selling 2x the 100 calls to buy 1x of the 95 calls??
Net debit of this trade would be $0.30Max Risk: $30…. You’d think… but nope, UNLIMITED!Max Reward: $470Breakevens: 95.30 & 104.70
RH PriceAT EXPIRATION
Back Ratio1x95/2x100 Spread
Back Ratio2x95/1x100 Spread
95/100|95CLimited Risk Reversal
RISK: UNLIMITED $470 $555
89 -$30 $30 -$555
90 -$30 $30 -$555
91 -$30 $30 -$555
92 -$30 $30 -$555
93 -$30 $30 -$555
94 -$30 $30 -$555
95 -$30 $30 -$555
96 $70 -$70 -$355
97 $170 -$170 -$155
98 $270 -$270 $45
99 $370 -$370 $245
100 $470 -$470 $445
101 $370 -$370 $545
102 $270 -$270 $645
103 $170 -$170 $745
104 $70 -$70 $845
105 -$30 $30 $945
106 -$130 $130 $1045
Defined Risk Option Strategies For Earnings
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Some musings:Let’s go back for a second and revisit the selling a call spread to buya call… but let’s be daring and go in the money with the call spread.So say we sell the 90 Call and buy 2x the 95 calls.The net debit of this would be $0.65
And it looks like this at expiration….
This is interesting….What about protecting that max risk zone with an iron butterfly?(Yes…. Web may have too much time on his hands)
RH PriceAT EXPIRATION
Back Ratio90/95 Spread
95/100|95CLimited Risk Reversal
RISK: $565 $555
89 -$65 -$555
90 -$65 -$555
91 -$165 -$555
92 -$265 -$555
93 -$365 -$555
94 -$465 -$555
95 -$565 -$555
96 -$465 -$355
97 -$365 -$155
98 -$265 $45
99 -$165 $245
100 -$65 $445
101 $35 $545
102 $135 $645
103 $235 $745
104 $335 $845
105 $435 $945
106 $535 $1045
Defined Risk Option Strategies For Earnings
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Some musings:So if I put the back ratio on (sell the 90 call, buy 2x 95 calls) for $0.65and then I sell the 90/95/100 Iron Butterfly for $4.00 credit.What do I have?Well the overall credit to my account is $3.35
I am short the 90 callI am long the 90 putI am long the 95 callI am short the 95 putI am long the 100 call
Say what?
Well originally I had:Short the 90 callLong 2x 95 calls
Then I sold 1x 95 call, 1x 95 put and bought 1x90 put and 1x100 call…So net, the above is my position….
Let’s look at the P&L sheet…
RH PriceAT EXP
Back Ratio90/95 Spread
Back Ratio combined with Iron Butterfly
90/95/100 Iron Butterfly
RISK: $565 $165 $100
89 -$65 -$165 -$100
90 -$65 -$165 -$100
91 -$165 -$165 $0
92 -$265 -$165 $100
93 -$365 -$165 $200
94 -$465 -$165 $300
95 -$565 -$165 $400
96 -$465 -$165 $300
97 -$365 -$165 $200
98 -$265 -$165 $100
99 -$165 -$165 $0
100 -$65 -$165 -$100
101 $35 -$65 -$100
102 $135 $35 -$100
103 $235 $135 -$100
104 $335 $235 -$100
105 $435 $335 -$100
106 $535 $435 -$100
Defined Risk Option Strategies For Earnings
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Some musings:Alright…. So say I want to sell a spread to buy a strangle??That way I have a pseudo bias for earnings, but I still don’t know whichway it’ll go….
So let’s look at the Limited Risk Reversal, and we’ll sell the 95/100put spread, and then we’ll buy the 100 call and the 90 put strangle.This can be done for $0.20 debit.
Let’s look at the P&L Graph….
And for giggles lets look at the original limited risk reversal alongwith the Iron Butterfly….
RH PriceAT EXP
95/100|95CLimited Risk Reversal
95/100 Sold Put Spread90/100 Strangle Bought
RISK: $555 $520
89 -$555 -$420
90 -$555 -$520
91 -$555 -$520
92 -$555 -$520
93 -$555 -$520
94 -$555 -$520
95 -$555 -$520
96 -$355 -$420
97 -$155 -$320
98 $45 -$220
99 $245 -$120
100 $445 -$20
101 $545 $80
102 $645 $180
103 $745 $280
104 $845 $380
105 $945 $480
106 $1045 $580
Defined Risk Option Strategies For Earnings
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Some musings:So I put on the 95/100|95 Limited Risk ReversalAnd I sell the 90/95/100 Iron Butterfly
To start withI am long the 95 callI am long the 95 putI am short the 100 put
Then I put on the IB which is:Short the 95 call and the 95 putLong the 100 call and Long the 90 put
My net position therefore is:I am long the 90 putI am short the 100 putI am long the 100 call
(one might note, this is nothing but a wider limited risk reversal…where the credit received to place was $3.45)
RH PriceAT EXP
95/100|95CLimited Risk Reversal
LRR & Iron Butterfly
90/95/100 Iron Butterfly
RISK: $555 $655 $100
89 -$555 -$655 -$100
90 -$555 -$655 -$100
91 -$555 -$555 $0
92 -$555 -$455 $100
93 -$555 -$355 $200
94 -$555 -$255 $300
95 -$555 -$155 $400
96 -$355 -$55 $300
97 -$155 $55 $200
98 $45 $145 $100
99 $245 $245 $0
100 $445 $345 -$100
101 $545 $445 -$100
102 $645 $545 -$100
103 $745 $645 -$100
104 $845 $745 -$100
105 $945 $845 -$100
106 $1045 $945 -$100
Defined Risk Option Strategies For Earnings
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Some musings:At the end of the day on Friday,here’s how the two compared:
Ultimately, taking on more risk (and therefore moderately less reward) increases the probability of profit….
Call Mark Strike Put Mark
15.90 80 0.02
11.05 85 0.02
6.35 90 0.15
2.15 95 0.95
0.35 100 4.20
0.07 105 8.40
0.02 110 13.40
June 2015 Option Chain (Fri)
RH PriceFriday 6/12RH closes at 96.22
95/100|95CLimited Risk Reversal
90/100|100CLimited Risk Reversal
RISK: $555 $655
96 -$165 $155
Defined Risk Option Strategies For Earnings
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RH PriceAT EXP
95/100|95CLimited Risk Reversal
90/100|100CLimited Risk Reversal
90/95|100CLimited Risk Reversal
85/95|2x100CLimited Risk Reversal
95/100|2x100CLimited Risk Reversal
RISK: $555 $655 $470 $1115 $525
89 -$555 -$655 -$470 -$615 -$525
90 -$555 -$655 -$470 -$515 -$525
91 -$555 -$555 -$370 -$415 -$525
92 -$555 -$455 -$270 -$315 -$525
93 -$555 -$355 -$170 -$215 -$525
94 -$555 -$255 -$70 -$115 -$525
95 -$555 -$155 $30 -$15 -$525
96 -$355 -$55 $30 -$15 -$425
97 -$155 $55 $30 -$15 -$325
98 $45 $145 $30 -$15 -$225
99 $245 $245 $30 -$15 -$125
100 $445 $345 $30 -$15 -$25
101 $545 $445 $130 $185 $175
102 $645 $545 $230 $385 $375
103 $745 $645 $330 $585 $575
104 $845 $745 $430 $785 $775
105 $945 $845 $530 $985 $975
106 $1045 $945 $630 $1185 $1175
Defined Risk Option Strategies For Earnings
• I encourage everyone to play around with option strategies as a kind of homework. • Use your platform to get end of the day option prices, and put together a list of different ways to play the
underlying using options.• Build a spreadsheet like I’ve done here with different prices on expiration.• Then just do the math:
An option that is In the Money at expiration is worth AbsoluteValue(Underlying Price – Strike Price)If I’m short that option, that’s not a good thing. If I’m long that option that’s a great thing!
All options that expire At the Money or Out of the Money are worth $0.00 on expiration.If I’m long that option, that’s not a good thing. If I’m short that option that’s a great thing!
• Example:I’m long the 95 Call, I’m long the 95 Put, I’m short the 100 PutIf the stock expires at 99, the spread worth?Long 95 Call is worth $4.00 (ITM by 4pts) -- GainLong 95 Put is worth $0.00 (OTM) – Loss Short 100 Put is worth $1.00 (ITM by 1pt) – Loss
I get to sell the 95 call and collect $400! But to avoid assignment I have to buy back the 100 put for $100. So my next income is $300. Then I just need to subtract what the trade cost originally to establish.
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Q & A With Web
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