Trade Design starring Dominos Pizza

One of the key aspects to trading earnings catalysts is in getting the trade design in an optimum format. This is not so much about always picking a direction, but more importantly having a design that allows you to take advantage of the frequent “ebb & flow” from the reaction to an earnings report.

To help illustrate just how common this is, and how you can “work” a trade if the design allows for it, I will discuss my earnings trade for $DPZ.

This trade involved a Call Fly and here are the details:

October 39/41/42 Call Fly for a debit of $.15 on 10/15/2012

So what does this mean? Here is the breakdown:

  • I am Long the October 39 Call
  • I am Short the October 41 Call (x2)
  • I am Long the October 42 Call

So in summary, I am long a 39/41 Call Spread & short a 41/42 Call Spread – this is a Call Fly. Now, let’s take a look at a 5 minute chart (with a zoomed in view):

As you can see above, price had a nice ebb & flow move this morning giving you a chance to unwind pieces of the trade in a very tactical way. Here are the details of my unwind:

  1. StC Oct 39 Call for 2.27 on 10/16
  2. BtC Oct 41 Call for .70 on 10/16 (1/2 pos)
  3. BtC Oct 41 Call for .35 on 10/16
  4. StC Oct 42 Call for .13 on 10/16
  • In step #1 I sell the long 39 Call
  • In step #2 I buy back 1/2 of the short 41 Call. This leaves me with a short 41/42 Call Spread then
  • In step #3 I buy back the remaining short 41 Call when price moves back down towards the $40 level. I am now left with a long 42 Call for October (some would consider this a “lotto” ticket at this point with a bid/ask of .15/.25)
  • In step #4 I sell the 42 Call for .13 given this is a significant move today and this option expires Friday – would need to move 2.5% more just to get ITM.

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