AAPL Earnings trade – Strangle

Yesterday, we identified a nice opportunity for an AAPL earnings trade. We sold a strangle at the 570 and 650 strike prices, but the important decision was the choice of expiry series. We could have played the weekly series that expires today, but this would have exposed us to large losses if AAPL made a big move. Instead, we noticed that Implied Volatility had also spiked up in Nov1 weekly series to 47%, and decided to take advantage of this opportunistic situation.

This was a safer trade because of two reasons –

1) There is no reason why the Implied Volatility of this series should be this high when the steady state IV of all expiry series was around 35%.

2) If AAPL did make a big move, then we have time to adjust if necessary. Figure below shows what happened to Implied Volatilty this morning after the earnings event. It crashed to 31%. Amazingly, the Implied Volatility of this series is the lowest of them all. This makes sense because as you approach expiry, the effect of Implied Volatility decreases, and premium gets sucked out of Options.

As it turns out AAPL did not make a big move. And with Implied Volatility crashing from 47% to 31%, this trade has become very profitable. The same strangle that we sold for $11.3 yesterday is now going for $2 (see Figure below). Β That’s a return of 10% (on the margin amount) in 1 day, or 3650% annually. Of course, not every trade can work out so successfully, but the takeaway is to try and spot a pricing anomaly by looking at Implied Volatility of different series during earnings reports times. We all give too much credit to market makers. They are also human, and every now and then you can spot a pricing error in Options. Once you see it, you need to move in for the kill..I’m very satisfied with this trade, so may be closing this trade. Although, if I hold it until next Friday, we could pocket the balance 2K of profit left in this trade. Maybe I’ll hold it over the weekend and pocket some more time decay, and get another 1K profit on Monday or Tuesday, at which point I will close it out.

Please post your thoughts below on this trade or if you took any other trade on AAPL earnings. If you sold premium, you did well..

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14 thoughts on “AAPL Earnings trade – Strangle

    1. Thanks Alex – didn’t realize its 1.3 now. Lets hold it over the weekend and we should get more time decay. I may buy it back for 50 cents on Monday. Looks like you already took it off..good for you πŸ™‚

  1. Trading these earnings is a hit or miss. you could hit the ball out of the park like you did with this trade here. But what ratio of trades actually work out like this one, very few I’d say.

    1. Carter, I completely agree. Trading earnings reports is a gamble. I don’t usually do this but in this case, bear in mind there was a pricing anomaly. This does happen every now and then because market makers are human too, and they make mistakes. If you do see such an opportunity, these trades can be blockbusters.

  2. A blockbuster indeed. The trick is to spot the mispricing. On the big stocks, its worth spending time on, but there are hundreds of such opportunities that come up on a regular basis and the trick is to filter them. What ideas do you have on this aspect ?

    1. Arthur, as a general rule, I trade only stocks that I know. And i also trade the major indices and the major ETFs. I think its important to know and understand how your stock has behaved in the past and you should have a good idea about how its price action is structured. Also helpful is the fundamental aspects of the stock, company financials and competitive landscape it operates in. However, if you were interested to see if particular stocks were experiencing high volatility or unusual volumes, trading platforms do have a screening filter – filters can be volume, put call ratio, open interest and many other parameters. I’ve tried these and you end up with stocks with symbols you’ve never seen before and I don’t like to trade these.

    1. Yes i like AAPL πŸ™‚ Unless it gets too volatile. Like right now, its swinging $20 every day. Its hard to put a credit spreads at this time..

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