Selling Premium – an Earnings strategy starring VMware

One of the common ways I trade Earnings – meaning I do a specific trade for an Earnings report – is to sell a Straddle or Strangle (prefer the Strangle). Several key things occur when you take this approach that are worth noting:

1) A range gets defined that price can move within (strikes chosen plus the collected premium)

2) This takes margin (so I like to focus on stocks with Weekly Options)

3) Oh, yes, I mainly do this with Options (sometimes stock may be involved pre-Earnings, sometime after – like as a hedge)

4) Option premium is elevated heading into Earnings – so I want to be a Seller

To illustrate how I initiate a trade – and what I may need to do after the event – I bring you a trade in $VMW & $BA. I will focus on $VMW for this post since it reported after hours and I did trade stock:

VMW_BAHere is a breakdown on the $VMW trade:

  • I am short the January 31 Weekly 97 Calls
  • I am short the January 31 Weekly 93 Puts
  • This was done as a 1/2 size position for a credit of $3.60
  • This gives me a range of $89.40 to $100.60 to work with

One of the key steps that I always have in the arsenal is to hedge with stock. In the case of $VMW I elected to use $90 as an area to short if it made a down move (which it did). The goal here is simple: “scalp” with stock to increase the cushion size (in this case $3.60) since this is the only step I can take in after hours (or pre-market) trading.

So far I have done 2 trades:

VMW_earnings_tradeBy hedging with stock – and not having a real bias, just following the trend after hours – one can extract additional $ out of the market to expand the cushion. The next step will be to monitor the short $93 Puts this week since price has fallen through that level in after hours. Potential adjustments (scenarios):

1) Sell Put premium for next week to buy back this week Puts (lower strike preferred). I would let the Short Calls go poof Friday

2) Unwind the Short Strangle Friday, keep the difference as the gain

3) Sell a new Strangle for next week, use proceeds to buy back the short one for this week

4) Ideal: price moves back into the $93-$97 range by Friday. The Short Strangle would expire worthless, I keep all the current cushion

6 thoughts on “Selling Premium – an Earnings strategy starring VMware

  1. As of 5:30 PM CST price is back above the $93 level so the Short Strangle is back OTM. For now.

  2. Interesting that you would do the short strangle as opposed to a butterfly or condor which would also have range bound profit potential but limited risk as well.

    Any special reasons for not going with the Iron condor?

  3. I want a simple approach each time, 2 pieces to each trade. I am fine with the % of time that price moves outside the range as I can hedge with stock. By doing a Sea Gull or Condor the collected premium is too small to give a practical range to work.

  4. I have added a new short stock hedge on 01/30 as price failed to hold the $93 level again.

  5. Interesting strategy. So essentially you create a win win type situation.

    You need a fair amount of cash on hand to cover those positions though. And if positions start going against you more times than not, that is a time to sell because you may have been wrong about the direction.

    Then again if you are in it for the long haul (like a naked puts or covered call strategy) I guess you won’t mind.

    Thanks for being so transparent with your trades, I will have to revisit from time to time to see how your trades are holding up.

    FYI – I mainly invest in Condors and Credit spreads because of the limited risk and limited profit profile.

    Dale

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