I had offered a trade idea for $RH into Earnings and thought I would list a few potential exit paths to take if you executed this trade. Here was the trade idea:
Long the September 85/90 1×2 Call Ratio
Long the September 80/75 1×2 Put Ratio
At the time I posted the message this trade cost $.60
This trade would take margin (at least until the “extra” short Option pieces were closed)
Now that Earnings is done, price has settled around the $78.50 level so the Put Ratio side of the trade is winning. So now what?
For most traders, taking off the Put Ratio is the step they would take. However, it is often the case that price never probes the bottom of the Ratio so leaving the premium to expire is worthwhile.
To help with a visualization of this trade, consider looking at the Put Ratio in a different way:
Long the September 80/75 Put Spread
Short the September $75 Puts
Treat these as 2 separate trades
If you think price holds in this area until expiration then you would sell the Put Spread when you feel it has found a solid floor. You would then place a Stop on the remaining $75 Puts that you are short with the goal of them expiring worthless. You may even be ok with being Put stock at $75. If price does hold in this area, the Call Ratio obviously expires worthless at expiration too.
Your trade, your process.
Disclosure: I did not execute this trade before Earnings. I did trade the stock in after hours though – after the report.
A Put Ratio in $DE using the September 26 weekly Options:
I would be looking for the $82 Puts to get ITM (in the money) by expiration
A few scenarios to consider:
1) Price is at $81 at expiry. I would let the 82/81 Put Spread auto-exercise for a $1 credit.
2) Price is at $80 at expiry. I would let the 82/81 Put Spread auto-exercise for a $1 credit. I would then evaluate if I want to be Put stock at $80 or not. I could consider adjusting those short $80 Puts to a future expiration as a possible step.
3) Price is at $85 at expiry. The Put Ratio goes poof.
I often get questions on the Option Ratio trades for Earnings that center around the exit of the trade. One of the key elements to the trade is the flexibility you get after the earnings event so it is important to know ahead of time what you will do in any scenario.
I thought I would use a current trade in $GIII to show one of the more ideal scenarios for price to follow. Here are the specifics on the initial trade:
Long the September 85/90/95 1×2 Split Call Ratio with short $75 Puts
This means I am long the 85/90 Call Spread & short the 95/75 Strangle
This trade was done for a $.15 debit
This trade takes margin
After the earnings report the stock made a run over $90 but stalled. My normal approach is to sell the only long piece of the trade: Long Calls. By doing this I am left with all short Option pieces with the plan being they would expire worthless. In this trade I just need to monitor the $75 & $90 price levels for a potential hedge (or buy them back if they get really cheap). I normally do this with Buy or Sell Short Stops.
The Long Term position in $GME acted well after Earnings. The remaining $CBI position in the Submarine Basket is the short October $60 Puts (the short stock piece hit a Stop for +$2.50). $KR is no longer an official SB position but the trade still remains with a 3% Trail Stop. The $BIOF position in the 50/50 Basket hit a Stop.
For those familiar with Option trading you will find the following graphic of no surprise:
Bid/Ask spreads. Ugh.
I am currently short the $230 Calls (2x, left over from a Call Ratio) and short the $205 Puts. One of the challenges on expiration day is to have the patience to let the bid/ask spread tighten so that you can close an Option in a reasonable way.
At the moment price is above $206 so the short Puts are OTM (out of the money). I obviously would prefer to not pay to buy them back (BtC – Buy to Close) and instead have them expire worthless. It seems the short Calls above will have no problem doing that
We ended July with a big RED day and have started out August with a lot of continued indecision along with more distribution. I focused mainly on Earnings trades this week but did find a few opportunities for the normal accounts. Newly added that survive to the weekend:
$PCYC (a new trade this week in the Swing account)