One of the common trade catalysts that I trade is earnings releases and typically utilize Options for one key reason: control risk of capital. There are many traders that avoid holding stock through earnings and that is certainly fine for their approach/style. For me, I want to participate in the earnings reaction so I frequently look for trades where there is a good expected move and there is ample Option volume.
A trade I put on today was in $ULTA and involved 3 pieces:
Short the June 90 Call
Long the July 90/95 Call Spread
This was done for a .48 credit
This is not a typical trade in that I am short a lot of Call premium — with the goal of playing an initial pullback and a rebound later in July. At least that is the plan when I do this type of trade.
The initial after hours reaction was positive, then a little shake, and then a run to test $90. With this trade structure I only have one task: hedge the short June 90 Call by going long stock (which I did). So now what?
What I have now is a covered call for June and I am long a July call spread. However, another view is to do this as an exit:
Sell the July/June 90 Call Calendar pieces tomorrow leaving me long stock with the short July 95 Call. Clear as mud? LoL
As I write this the stock is trading at $92 in after hours.