One of the tasks in planning a pre-earnings trade involves scenario planning for after the event. What this means is an effort has to be made to consider the potential scenarios for price after earnings is over – and the reaction has occurred.
One of the common trades that I put on is Risk Reversal using Options. One of the scenarios that puts pressure on this type of trade is when price goes down, towards the short Put strike for whatever is sold.
For a look at a real trade in progress, I will use the current $UA trade as an example. Here is a summary:
- I am short the November 60 Call
- I am long the December 60 Call
- I am short the December 47.5 Put (2:3 ratio)
This trade was put on for free.
Now that the event has occurred, price has moved down to the $53 level where it is trying to find some footing. So let’s take a look at how the trade looks.
Here is the current bid/ask for each Option piece above:
- November 60 Call is at .10/.20
- December 60 Call is at .60/.70
- December 47.5 Put is at 1.10/1.20
The scenario that I look for here is what I call the “drop pop” play. Since price has fallen from the close yesterday, I could consider buying back the short November Call and leave the other 2 pieces. This works well if price slowly recovers into November and the end of the year (Dec expiration) = December 60 Call grows in value & the short 47.5 Put decays more.
Another scenario is to just let the November Call expire and keep the remaining dime or so in premium (just think about that for a while, uncap the Dec long Call for a dime here).