One of the strategies to trading an Earnings catalyst is to actually wait for the post-Earnings move – and then construct a trade. I did just that in $BLOX today:
This was the second trade that I have done post-earnings (the first trade I was long stock overnight).
My approach in this trade was still the same though – wait until I thought there was a good bottoming process occurring. Once I felt that was the case this morning, I elected to sell the December 35 Puts for $2.30 credit (1/2 size position to start).
One key step in my process however is to monitor the price action to make sure that it does not breach the strike level (in this case $35). Once it did, I went short stock at $34.80 as a hedge on the short Puts. This usually affords me a minor cushion when price over-shoots a level. However, price continued to erode so the hedge ends up being VERY important in this trade as it is protecting the short December Puts.
Price has just fallen through the $33 level – the stock is down over 25% now. Yikes.
So what next? Let’s look at a few scenarios:
1) The stock stalls at $33 & finally finds a bottom. I would cover the short stock hedge for a $1.80 gain. This would bring the overall cushion in the trade to $4.10 but I would still be short the December 35 Puts (ITM) so I would only do this step if I anticipate a recovery to that strike level by expiration
2) The stock rebounds to $35. No harm no foul. I would cover the short stock hedge and leave the short December Puts alone