In my portfolio update last week, I highlighted some earnings-related options straddles for this week. Again, 95% of my portfolio is long-term buy and hold style investing, but for whatever reason, I keep coming back to these straddles……yeah.
There are a few terms I’ll use when discussing these which are outlined below:
Definitions from investopedia.com:
Strike price: A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.
Expiration date: An expiration date in derivatives is the last day that derivative contracts, such as options or futures, are valid. On or before this day, investors will have already decided what to do with their expiring position.
Premium: An option premium is the current market price of an option contract. It is thus the income received by the seller (writer) of an option contract to another party. In-the-money option premiums are composed of two factors: intrinsic and extrinsic value. Out-of-the-money options' premiums consist solely of extrinsic value.
For stock options, the premium is quoted as a dollar amount per share, and most contracts represent the commitment of 100 shares.
Before an option expires, its owners can choose to exercise the option, close the position to realize their profit or loss, or let the contract expire worthless.
Long Straddle: A long straddle is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. The strike price is at-the-money or as close to it as possible. Since calls benefit from an upward move, and puts benefit from a downward move in the underlying security, both of these components cancel out small moves in either direction, Therefore the goal of a straddle is to profit from a very strong move, usually triggered by a newsworthy event, in either direction by the underlying
Why am I doing these straddles?
Answer: I don’t know
Real answer: I plan to stay fully invested in my core positions unless I see problems with their businesses. We will get a look into the last quarter and guidance for the next quarter and the remainder of the year soon when our companies begin reporting earnings.
But I am expecting a lot of volatility in the market and in certain companies as they report earnings. I want a chance to capitalize on that volatility.
This type of trading really is annoying because it requires too much hands-on time for busy professionals (mostly with families) that want to invest. Straddles and options trading certainly are not necessary to grow long-term wealth (and are usually counterproductive in that endeavor) so please don’t feel like you have to do this.
Bought 5 x TEAM: Nov 01 (expiration date), $123 (strike price) straddle for $12.69 (premium I paid). So basically, I needed the stock to move to $110 or $136 to be profitable.
To find the break-even price (where the trade becomes profitable), you take the strike price minus the premium for the low end and the strike price plus the premium for the high end.
In this example, if the stock drops to $110, we would sell the put for $13.00 and the call would be worthless. Or, if the stock jumps to $136, we sell the call for $13 and the put is worthless
Remember to multiply the premiums by the amount of contracts (in this example, 5) and then by 100 because each contract represents 100 shares. So this straddle cost
It doesn’t always work this way and this isn’t exact math because there is something called time value involved with options…but it’s close enough to work.
I won’t breakdown each example like this (too time-consuming), but you can apply the exact same framework and calculations to the other trades.
Result: Closed the puts for $9.90 and still hold calls. Worse case, those expire worthless. There’s a small chance TEAM recovers back to $123 or higher next week which would make the calls worth something, but we will assume they expire worthless to be conservative.
Loss of $2.79 on this straddle x 5 x 100 = -$1395
Bought 2 x ISRG: Nov 01, $532.5 straddle for $28.5. Needed about a move to $504 or $561 to be profitable
Result: Closed calls for $36 Friday, Oct 18 after earnings and closed the Puts for $5.00 ($41 total) on Wednesday, Oct 23 when the stock had dropped back down. So $41 (total proceeds) - $28.5 (premium originally paid) = profit.
Gain of $12.5 x 2 x 100 = $2500
Total gain = $1105
Bought 25 x SNAP Nov 01, $13.5 straddle for $2.16. Need a move to $11.25 or $15.75 to be profitable.
Result: still holding this one. There’s a chance we take a big loss on this one, but I’ll wait to see what happens to calculate it.
Total gain = $1105 with $5,400 still open (SNAP straddle)
Bought 2 x ALGN Nov 01, $215 straddle for $22.20. Need a move to $191.78 or $238.22 to be profitable
Result: Sold calls after a big pop from earnings for $33.00. I still have the puts, but we will assume they expire worthless to be conservative. $33 - $22.20 = $10.8 profit.
Gain of $10.8 x 2 x 100 = $2160
Total gain = $3265 with $5,400 still open (SNAP straddle)
Bought 2 x NOW Nov 01, $255 straddle for $25.27 needed a move to $228.38 or $281.62 to be profitable
Result: sold puts on Wednesday, Oct 23 when investors were spooked from CEO departure announcement for $39.00. I still hold the calls and they announced strong earnings after the market closed and now the stock is rallying a bit. There’s a small chance the calls end up being worth something but we will assume they expire worthless to be conservative.
Gain: $39 - $25.27 = $13.75 profit per contract x 2 x 100 = $2,746
Total gain = $6011 with $5,400 still open (SNAP straddle)
Bought 2 x TSLA Nov 01, $262.5 straddle for $25.8 needed a move to $237.23 or $287.77
Result: sold calls after a big earnings pop on Thursday, October 24th for $42.00. Still have the puts which will likely expire worthless (but hey, you never know!).
Gain: $42 - $25.8 = $16.2 x 2 x 100 = $3240
Total gain = $9,251 with $5,400 still at-risk (SNAP straddle)
Bought 5 x IRBT Nov 01 $55 Straddles for $9.4
Result: sold the puts after an earnings drop for $8.00. Still have the calls which will probably expire worthless.
Loss: $8.00 - $9.4 = -$1.4 x 5 x 100 = -$700
Total gain = $8551 with $5,400 still at-risk (SNAP straddle)
Bought 8 x SKX Jan 17, 2020 Straddles for $6.42
Result: I still have some time on these but the stock didn’t make a big move after earnings so I’ll hold and hope for the best.
At-risk: $6.42 x 8 x 100 = $5,136
Total gain = $8551with $5,400 at-risk (SNAP straddle) & $5,136 at-risk (SKX straddle)
Bought 5 x NBIX Nov 15, $95 straddle for $10.24 need a move to $85.09 or 104.91
NBIX reports earnings on Monday, Nov 04 so we won’t have an idea of how this turns out until Tuesday Nov 05.
Total gain = $8551with $5,400 at-risk (SNAP straddle) & $5,136 at-risk (SKX straddle) & $5,120 (NBIX straddle).
Bought 10 x LOGI Nov 15, 2019 $40 Puts for $1.34 which will likely expire worthless. Stock went up after earnings, not down.
Loss: $1.34 x 10 x 100 = -$1,340
Total gain = $7,211 with $5,400 at-risk (SNAP straddle) & $5,136 at-risk (SKX straddle) & $5,120 (NBIX straddle).
Right now we’re looking at a $7,211 profit with about $16,000 of risk still on the table. There’s a chance this entire thing ends up losing me about $9,000.
I’ve had to have A LOT go right in order to even be in a position where this might be profitable. That’s so much work and time put in.
An alternative would have been investing the money into my core positions which probably would be much more profitable and easier in the long run.
Final takeaway: stop trading options Austin… for the third (or fourth time).
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