Hello all,

 

So, I recently took at straddle of OTM on $INTC and it worked really really well. I ended up +200% on the 8% move to the downside. If I had had the capital I would have straddled $TWTR too. This week we have AAPL and TSLA reporting...and these are 2 VERY different beasts which will nicely show when to straddle at earnings and when to pass.

 

First, straddling consists of buying a call, while simultaneously buying a put. I choose the first OTM strike (Out of The Money) and I also take the shortest term expiration. In this case it’s AUG 3. The underlying idea of a straddle is that the price will move sharply one direction or the other, which causes one leg to be well in the money, while the other drops to $0. This trade benefits wholly on the fact that the one leg cannot go below $0. Most of these trade become profitable when the stock moves >2% in a very short period of time (within a day), otherwise theta decay will cost you money. IMPLIED VOLATILITY IS THE MOST IMPORTANT FACTOR WHEN TRADING A STRADDLE!!! As implied volatility is higher >40% the option premium dramatically increases.

 

The Trade: AAPL is ripe for a straddle right before earnings due to implied volatility being around 21%. Expect it to rise right before the earnings call, but not by much. At the current prices a 1.7% move in AAPL after earnings will result in a profitable straddle. However, TSLA on the other hand has an implied volatility of 78% and would require a 4% change in price for a straddle to be profitable. I will be buying the AAPL straddle, but definitely NOT the TSLA. I know that TSLA has been getting beat up lately and some might think it’s going to plummet, but I feel the market has priced in much of TSLA’s woes. As of late, we are seeing companies with stellar earnings take beatings on very dumb reasons. V, MA, INTC to name a few. My personal opinion is that the consolidation we’ve all been waiting for is happening RIGHT NOW. AAPL will likely be the next victim. If I had to guess, it’s going to crack and fall to $160-$177 immediately after earnings REGARDLESS of how well the report is.

 

The trend I’m seeing is: News report about amazing earnings beat, followed by a series of articles trying to blindly guess the reason the stock’s price is falling. But instead of just takingin naked puts against earnings, I take the straddle as protection and possible profit. Happy hunting and good luck!