Strangle Swapping Apple

The mechanics of the earnings temptation.

Setting the Table:

• When the market says it expects volatility, it’s worth listening. Those extra two points of IV this week were saying something. (Perhaps not enough?)  We had a calendar of known events this week between earnings and macro data points, which have zigged and zagged to leave the market stumbling.

  • From Monday:

• One of the most difficult things about trading earnings reports is how contextual they tend to be. Professional traders will look back at historical releases to get a gauge for how much something can move. This is then normalized by the volatility environment - a 5% move in a VIX 15 environment is likely to be received differently in a VIX 30 environment. 

  • AAPL and META are salmon swimming upstream in this market. Yesterday META had a solid report, and in a buoyant post-Fed market floated $10 past its $40 straddle. As the day wore on, stock pulled back to close only +$20. AAPL also had a solid report, and is struggling to stay afloat as the rest of the market is down significantly in early trading.

    

• Earlier this week I released a survey called “Getting to Know You”. If you haven’t had a chance to take a look, please find it here. The responses have been very helpful so - thank you. 

Based on your feedback, this week I dig specifically into the mechanics of an earnings trade, and how and where it makes money. 

Identify:

• There are two ways to play earnings - not at all, or actively. Volumes surge around these news events as speculators try to take advantage of higher than expected (or less than higher expected) variance, and long holders nip and tuck their positions.

• A good trader should always be skeptical of their edge. This is especially true when there are extra eyeballs on a narrow scope. If you buy and hold AAPL, there’s plenty of time to be right. Selling earnings straddles - this is one shot, and everyone’s watching.

• Today we’ll explore how to manage an active earnings strategy. It’s about the execution - not some mispricing or premium collection.

  •  Next week, tune in for how to manage a protective overlay on long term positions in advance of a potentially volatile news release.