I received some great questions yesterday regarding a post-earnings trade that I initiated for $BBBY and thought I would provide a breakdown here on what the strategy is as well as a few scenarios on how it can play out.
Here are the details:
- Long stock at 55 on 12/20 (1/3 position)
- Short the December 55 straddle at $.98 on 12/20 (1/3 position)
So what does this mean? I often scale in (and out) of trades so this is a typical approach for me to enter a trade in pieces. The twist here is that I elected to sell premium on $BBBY due to its elevated IV. In selling the straddle, being short a Call and a Put, here are 3 potential ways that this trade plays out:
- Price stays above $55 so my long stock position is called away. The gain is capped at 55.98 no matter what. Trade would then be closed.
- Price stays flat to down, but stays above the $55 strike. Can buy back the Short Call piece and let the Short Put piece expire worthless. I would keep the balance of the premium collected and still hold a 1/3 position long in the stock.
- Price drifts under $55. Depending on where it is by 3 PM EST, I would utilize the $.98 in premium collected (my cushion) to manage against the loss I would have on the long stock position.