an Earnings Trade review – before the event

I often times like to do a post on an Earnings trade idea before the event to lay out some of the potential scenarios that can occur post-Earnings. For this post I will look at a trade idea in $URBN:

  • Long the March 39 Calls
  • Short the March 40 Calls
  • Short the March 34 Puts
  • This trade closed at a ~$.05 debit on Friday, 03/07

With this trade idea you are long a March 39/40 Call spread and short the March 34 Puts. This trade can make $1.00 on a move up above $40 but you also have to be comfortable owning at $34 if it falls hard.

Here are some scenarios:

1) The stock pops to $39 but stalls (overshoots the 200 SMA above at 38.90). The March 39 Calls will have some value but the other 2 pieces will likely lose some value (IV shrinks after the event). If this level holds to expiration you will likely break even or slightly better by selling the $39 Calls & let the other 2 pieces go poof

2) The stock pops to $40. I would exit the CS for good value & buy back the short Puts to close the trade

3) The stock falls to $35. I would let the trade ride until expiration to see if all 3 pieces expire. The loss on the trade would be the initial debit of the trade

4) The stock falls to $32. In this rare instance of such an outsized move, it would be imperative to be sure to hedge with stock when price got anywhere near the $34 level

5) The stock pops to $42. Your capped. Boo. Nothing you can do but get max value out of the CS

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