Second Helping

The first round of our IV crush earnings plays was a resounding success and as there’s about a week’s worth of announcements left in this quarter we are pumped and ready for a second helping.

 

vega crushThe next round of Operation Vega Crush begins

Photo via artcarcentral.com

 

If you are new to options then I suggest you point your browser to to the first three posts in our ongoing tutorial series on option theory. Once you develop a basic understanding of what we are doing and how, selling volatility ahead of earnings announcements may become another profitable tool in your trading arsenal.

If you are a noob to options but want to shadow our campaigns with real coin then we recommend that you only take out one single position so as to keep your exposure as small as possible. This way, if you somehow screw something up, e.g. place the wrong strikes or the wrong months, the damage should be minimal.

When in doubt ask away in the comment section [over at Evil Speculator, ed] – both Jay the Option Executioner as well as yours truly will be happy to answer any questions you may have.

 

New Victims

Alright, so let’s introduce our latest victims – starting with Alibaba.

 

Alibaba, Symbol: BABA

Strategy: Limping Condor

Idea: Sell inflated pre-earnings IV.
When To Enter: Before 5/5 earnings announcement.
When To Exit: After earnings announcement OR we hold through expiration if there is little IV movement.

Strategy Details:

 

1-BABA detailsDetails of BABA pre-earnings Limping Condor strategy

 

2-BABA_details-graphic

Click to enlarge.

 

Initial outlay: $30 (net debit)
Maximum risk: $182 at a price of $54.25 at expiry
Maximum return: $181 at a price of $80.50 at expiry
Break/evens at expiry: $84.30, $67.90

 

3-BABA_IVBABA: historical vs. implied volatility

 

Considerations:

BABA’s earnings come out tomorrow morning and front month IV is running almost double HV. With HV at a very low level of 18%, even double the normal volatility should easily fall within the short strangle part of our LC (the short call and put). In this case, we’re leaning towards the LC (as opposed to the Double Calendar) because this strategy has a superior payoff in the event the stock does very little on expiration. If BABA doesn’t move post earnings, the strategy will still collect nearly $70 (on just a $30 initial outlay).

 

Mobileye

Next on the crushing platform is Mobileye, a company that develops vision-based advanced driver assistance systems providing warnings for collision prevention and mitigation. Not that I care, for me it’s just another symbol to be manhandled.

 

Mobileye, Symbol: MBLY

Strategy: Limping Condor
Idea: Sell inflated pre-earnings IV.
When To Enter: Before 5/5 earnings announcement.
When To Exit: After earnings announcement OR we hold through expiration if there is little IV movement.

 

Strategy Details:

 

4-MBLY-detailsMBLY, details of Limping Condor strategy

5-MBLY_details-graphicClick to enlarge.

 

Initial outlay: $34 (net debit)
Maximum risk: $185 at a price of $20.80 at expiry
Maximum return: $111 at a price of $40.00 at expiry
Break/evens at expiry: $42.05, $31.40

 

6-MBLY_IVMBLY, historical and implied volatility

 

Considerations:

MBLY’s earnings (tomorrow) have also created an extreme gap between IV and HV – almost as much as a 30% difference.  Once again, we like the LC payout in the event of a boring earnings results.   A non-move would pay about $50 on an initial outlay of just $32.

Because MBLY’s volatility environment (both HV and IV) are a bit higher relative to most other stocks, we’re going a bit more conservative on this LC. We used the straddle price plus $0.50 on each side to determine our short strikes (normally, we just use the straddle price by itself).

Just a note about max risk – it should equal the difference between the short and long strike (in this case 1.5 or $150) plus the initial outlay ($34), or $184 total (giver or take a $1 due to rounding).

 

Charts by: Evil Speculator, iVolatility.com

 

Originally published as “Vega Crush Candidates at evilspeculator.com.

 

 

 

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