I started preparing early for an earnings trade in $GIS this week and posted this chart a few days ago as one perspective to consider:
A key step in my process is to review the Option Chains to look for clues on what the market is thinking/expecting. The Open Interest is usually a very good place to review – lots of clues come from there.
I ultimately settled on the following trade (although I did post another trade idea this weekend):
- I am Long the July 48 Put
- I am Short the July 47 Put
- I am Short the August 46 Put
- This is a 1×2 Ratio in that I am short 2 times the amount that I am long
Trade rationale was this:
- I expect short-term weakness so want to participate in that
- I expect a rebound or a price level to be defended, maybe a bounce but ok if it just churns
- I wanted a trade for Free or better
Now on to where I am at the moment. This morning in pre-market the stock reacted in a mildly negative way so I elected to plan on selling the Long July 48 Put – thus leaving me with just the Short Put pieces. So far the $48 level has held ok so this approach is working good.
My cushion is currently at $1.01 with the July 47 Put level what I need to monitor.