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Friday, November 17, 2006

Strangle on BKS earnings

-What did I buy?
Nov 40 Put and Nov 45 Call. The strangle cost a total of $0.35

-Why did you buy Nov options?
Simply because it is cheap. I am aware that Nov options expiration is just 2 days away. So this is a VERY high risk trade and I'm prepared to lose 100%. Why? Because 100% loss is only $0.35!

-Isn't this a gamble then?
No. Trading is a probability game and some study has been made on BKS before I decided to buy a strangle. I've looked at the recent past few earnings of BKS and see that they tend to make a minimum move of about $3 (within 2 days after earnings announcement). Average move is about $4. At the point of entry, the stock was trading at about $42.87, smack in the middle of 2 strikes. And with a minimum move of $3, it will be able to move into the money. And I am only assuming minimum move here only, so it is a conservative scenario.

-How did you exit?
BKS moved down pretty fast in the 1st 15 min, but rebounded. At this point, my position is in the red. But because cost outlay is very low, I say it was a stress-free trade. The stock hit 20 EMA resistance, unable to break and came crashing back down. I set an alarm in IB (my broker) to ring if position breakeven. Around lunch hour eastern time, it rang. I was watching it closely as it nears $40 mark because this is a strong support area. I closed the Nov 40 Put for $0.4 when stock price was about $40.05. I didn't want to hold longer because of several reasons:

->$40 mark is strong support. Not to mention possible pinning effect on expiration day

->From the intraday high of $43 to the low of $39.94, it has already made the $3 minimum move. There is no guarantee it will continue its downward move tomorrow and if otherwise, my position will be reduced to zero due to rapid time decay

->I've learnt from my past experience that when trading with current month options which is so close to expiration, grab whatever profit you have and don't be greedy.

So there you go, a strangle on earnings play. I must stress that strangles are always more risky than straddles because you need to have a bigger move to breakeven, even though capital outlay is lower. And it is even higher risk when you buy a current month strangle so close to expiration. All I have to say is do your due diligence and be aware of the risk you are taking when you want to do this type of trade.


Anonymous Anonymous said...

Nice stress free play. I had a stressful day holding a google iron condor at 480/490 - 500/510... Held 3 options at each end and managed to close the 500/510 (sold for 0.35) one at a time at 0.25, 0.15 and let the last one expire.

GOOG was hovering and threatening at 499.50 twice. Although each time a large block of sell order appeared each time it does that.

Eventually, the time decay turned to my side (at ard 3pm) and I barely made good the escape. The lower end (constructed the day before) expired for a large profit as expected.

The thing is GOOG was very tradable up to 2.30pm with gains to be made near the money for both buyers and sellers for just a little premium.

However, this is probably just luck. I hope i won't be doing that next month. Things could get ugly if i was unlucky.

1:47 PM  
Blogger Simply Options Trader said...

Hi Anon:
Couldnt agree more with you on GOOG. I've done spreads on GOOG before. While it can make you good money, it can also get very ugly when things don't work.

Certainly not for the faint-hearted! Am glad you had a profitable trade on this one.

3:15 PM  

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