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Vega Crush Candidates
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Vega Crush Candidates

by The MoleMay 4, 2016

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. If you’re 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 as to keep your exposure as minimal 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 – both Jay the Option Executioner as well as yours truly will be happy to answer any questions you may have.

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:

 Action  Strike Type  Premium  Price
Buy 1 20th May $69.00 Put $0.58 -$58.00
Sell 1 6th May $70.50 Put  $0.44  $44.00
Sell 1 6th May $80.50 Call  $0.59  $59.00
Buy 1 20th May $82.00 Call  $0.75  -$75.00
Net Debit   -$30.00

2016-05-04_BABA_details

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

2016-05-04_BABA_IV

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.

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:

 Action  Strike Type  Premium  Price
Buy 1 20th May $31.50 Put $0.57 -$57.00
Sell 1 6th May $33.00 Put  $0.38  $38.00
Sell 1 6th May $40.00 Call  $0.33  $33.00
Buy 1 20th May $41.50 Call  $0.48  -$48.00
Net Debit   -$34.00

2016-05-04_MBLY_IV

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

2016-05-04_MBLY_IV

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).

 


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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