One of the trading opportunities that I participate in frequently is Earnings. This is a known catalyst – one that moves price. Today I have entered a trade in $CRM and here is the breakdown:
- I am short the November 22 weekly 56 Straddle
- I am long the November 29 weekly 56 Straddle
- This was done for a debit of $.29
- This does not take margin
- Risk is well-defined
So how does this trade work? Let’s look at some post-earnings scenarios:
1) The stock goes nowhere, trades sideways, or ends up back near the $56 level into Friday expiration. Hallelujah. I would buy back the “winning” side. This would leave me long the November 29 weekly 56 Straddle into next week expiration. I may consider selling some premium for next week to build a positive Option cushion.
2) The stock goes down, settles at $54 a share by Friday expiration. I would likely sell November 29 weekly premium to buy back the short 56 Puts for this week. The short 56 Calls for this week would go poof.
3) The stock goes up, settles at $58 a share by Friday expiration. I would likely sell November 29 weekly premium to buy back the short 56 Calls for this week. The short 56 Puts for this week would go poof.
4) In scenario #2 or #3 above there are other potential steps besides creating a Spread for next week & using those proceeds to buy back the winning side for this week. One choice is to adjust one or both strikes to achieve a credit.
I know, clear as mud. LoL