Tuesday, January 22, 2013

Rare $ISRG earnings trade

1/22/2012:
 If you already follow me then you know that I like to sell option spreads. You also already know that I don't like to take positions into earnings because I can't foretell HOW the markets will react to the reports. All the homework in the world can't give me ANY insight on that reaction; I can have certainty in say the size of the move but as for the direction it's no better than a coin toss.

Here comes the shocker: Just before today's close, I tweeted that I initiated a long $ISRG position going into earnings.

THE THESIS:
Why break my rule? I felt that the recent drop in ISRG gave us a sneak peak at its LOW levels. On my chart, I marked those areas with the horizontal lines and hand-drawn rectangle (sorry too much coffee and hand jittery). I felt like the 'world had ended' for ISRG with a few really doomy headlines and dropped and popped around the hashed zone for a few days. So, if the world ended AND YET it held the 480's then it must be a really strong support going forward.

THE TRADE: Long ISRG via Credit put spread.

NOW WHAT? 1) if ISRG opens around 560ish (as I write this article it's at 566ish) then I will look to add an upper leg and turn this credit put spread into an Iron Condor. I will carefully look for a good level to take a credit call spread. or 2) if the premiums disappear on the CPS I already sold today then I may close it and cash in the ISRG play. or 3) same as #2 (close the CPS if cheap enough) and start looking for a cap on it. Whatever I do, I will make sure not to ruin a perfectly good trade.

NOTES: looking at the chart I see an earnings pop/gap that fizzled and proved to be a top (oval). This pop will guide me in finding upper levels (should I decide to cap it). The red x on the chart shows where it's trading after hours which coincides with recent resistance. Usually, when I try to cap the run of a fast runner I go much higher than price; likely about 600+ for ISRG as it's proven over and again that this sucker can run circles around Usain Bolt!



THIS IS NOT A RECOMMENDATION; STOCK OPTIONS CAN CAUSE HEAVY FINANCIAL AND SLEEP LOSSES. I ONLY TRADE WITH MONEY THAT I CAN AFFORD TO LOSE.