This is Friday and from time to time I like to post something 'different.' Also given the broader markets plummeted 2 to 2.4% today's (10/19/2012), we need a little fun! Here is a trade that you won't see on CNBC.
Okay, so I want to participate in a company's earnings. It's a great company that sells every trinket it makes and almost everyone in the world is willing to buy its products and at a premium.
So what's the problem? Can't I put a trade on based on analysis, channel checks, and technical dissection layered with Fibonacci levels, moving averages?
Lately, it would seem that the market reactions to the earnings override all the research and analysis. That being said, I don't want to gamble my money away on how the markets will react to numbers that could have been blow outs but a comment (or even the CEO word count - Sergei 1st call after his return to Google) could have an adverse reaction and the stock could lose 10%.
Here is a setup that puts almost NO dollars at risk while gives me a chance to profit off big moves. Sure I could buy strangles and hope for a big enough move for it to be in the money but I don't like those odds. Besides, this if crazy Friday trade. I call this a 'SOLD SPRAWL' (totally made it up):
Instead of buying a position I sell 2 spreads ALL In the money: One call spread and one put spread. SAY WHAT? all in the money? Yes, Since they are already all in the money (the wrong way) I can't lose any additional money (other than a few pennies for order execution issues). I am putting on a trade that is already all under water.
Say earnings are coming next week, I will use the weekly options. Expectations are likely that it will move 8-10% so the 1-wide spread premiums are close to $5 at those edges of the predicted move.
* Position A: sell credit Put spread way above current price so all in the money (I need to see premiums next week). +$4.9. Here I am going long it at the high level chosen
* Position B: Sell credit call spread - as close to all in the money as possible and take in 4.9 or more? premiums should be juiciest during the week. +$4.9. Here I basically am shorting the stock at the level chosen.
In both cases, the maximum I could lose is ten cents $0.10 since both positions are already as bad as they get (almost all the way under water).
Scenario 1: Stock sells off hard.
Position A doesn't improve and I will likely take the .10 loss I mentioned earlier.
Position B improves tremendously and I can likely buy it back for much less than I took in. If the move was full as expected by options premium then the profit on the credit call spread could be close to full so make $4.5 or more. Even if the move turns out to be half of expectations, I still get to profit $2.5. PosA loss is the same; Pos B profit is half.
Scenario 2: Stock Pops huge. This is the exact opposite of Scenario 1.
Position A improves by the size of the pop; so if close to full pop then profit should be around 4.5.
Position B doesn't improve and again likely to take the ten cents loss.
Even if the move turns out to be half of expectations, I still get to profit $2.5. PosB loss is the same; Pos A profit is half.
Scenario 3: Stock does nothing.
position A & position B do nothing and I can buy them both back for about as much as I took in to put them on + commission.
I will paper-trade this next week w/$AAPL and see what happens. I will post.
There is another possibility which is getting assigned if someone exercises their options on me so I make sure I have enough margin room to not lock up my account. Since they are $5 spreads if I get assigned then I can immediately exercise my protection leg and not lose much anything more than what's described above.
One more risk is an early report release (can you say Google?) or a pre-announcement of sorts from the company.
THIS IS MOST DEFINITELY NOT A RECOMMENDATION. I ONLY TRADE WITH MONEY I CAN AFFORD TO LOSE. OPTIONS ARE DANGEROUS AND CAN LOSE MONEY FAST. DON'T TRY THIS AT HOME!!!!!!