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):
- StC Oct 39 Call for 2.27 on 10/16
- BtC Oct 41 Call for .70 on 10/16 (1/2 pos)
- BtC Oct 41 Call for .35 on 10/16
- 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.