$FB Earnings Double Diagonal Papertrade

7/30/12

Here's an update to this trade after the weekly options expired.

The short put expired ITM by $1.29.
The long put is currently worth $1.60.
The short call expired worthless.
The long call is currently worthless.

So you could close the put side out for a credit of $0.31 right now.  Adding in the initial debit that would net a profit of $0.26 per lot.  Not terrible.

7/26/12
Paper trading this one since it's Facebook's (FB) first public earnings report.  Will update after they report.

Since I don't have a bias either way, I'll be doing one my favorite way to play earnings, a double diagonal similar to this AAPL trade.  This involves selling an OTM front-month (or week) put and call, and buying further OTM back-month put and calls.  For example:

Trade:
STO FB 27Jul(w) 25 Put for $0.65
BTO FB Aug 12 23 Put for $0.65
STO FB 27Jul(w) 30 Call for $0.60
BTO FB Aug 12 32 Call for $0.65
= net debit of $0.05 & $200 margin requirement per lot

Note that the margin requirement only remains for as long as you hold the short options.  You can see the P&L chart below.  Breakeven is at 24 and 32.

$AAPL Post-Earnings Trade Summary

As most of the free world knows, Apple (AAPL) reported their Q3 earnings after last night's close.  As everyone also knows, Apple missed by 10% (9.32 vs. 10.37).  That may seem like a lot.  But consider the fact that they brought in $35 billion (with a B) in 13 weeks.  This represents a 22.6% yr/yr increase.  Oh and did I mention they're paying a $10.60 dividend per year?  The biggest concern for me was their lower Q4 guidance of $7.65.  Needless to say, I'll be looking to buy some LEAPs soon.

Anyways, having said all that, I didn't have any ER plays in place last night.  While I did tweet one potential play (which turned out to be a loser), I had a few others in mind.  Two bullish and two bearish.  With Apple close at 575 today, let's see what the trades were and how they turned out.

Call Diagonal
The first bullish trade, and the one I tweeted, was a call diagonal.  Note that this trade would require $2000 of margin for each lot put on, but it would only need to be carried until the short strike was rebought or expired.

Trade
STO AAPL 27Jul(w) 635 Call for $3.50 credit
BTO AAPL Aug 12 655 Call for $3.90 debit
Net debit of $0.40 per lot

As of right now, the spread is worth $0.28 ($0.32-$0.04).  If I had this trade on, I could let the short call expire worthless at the end of the week and hold the long call as a lottery ticket.  Or I could close down the entire trade and only be down $0.12 per lot.  Not too bad.

Put Diagonal
The second trade was merely a bearish version of the previous one, a put diagonal.  Same margin requirements apply here.

Trade
STO AAPL 27Jul(w) 570 Put for $5.05 credit
BTO AAPL Aug 12 550 Put for $5.50 debit
Net debit of $0.45 per lot

As of right now, the spread is worth $2.77 ($4.75-$1.98).  If I had this trade on, I could:

• Take profits now
• Buy back the short put and let the long put run
• Let the entire trade ride in hopes of draining the remaining $1.98 out of the short put
• If you put on multiple lots, close down enough of the spreads to ensure you break even on the trade and let the rest run

Double Diagonal
Even if you were to combine both strategies to be relatively delta neutral going into earnings, you would still be up $2.20 per lot.  The trade would've even been profitable had the stock stayed relatively unchanged today.

The low cost to enter these diagonals is what makes them favorites of mine.  But they are not completely devoid of risk, hence the margin requirement.

Call Butterfly
The last two trades are simply call & put butterflies.  Starting with the call fly:

Trade
BTO AAPL 27Jul(w) 630 Call for $4.70 debit
STO 2x AAPL 27Jul(w) 640 Call for $5.40 credit
BTO AAPL 27Jul(w) 650 Call for $160 debit
Net debit of $0.90 per lot

Right now these would be pretty much worthless.  Your only choice would be to hold them for another few days as lottery tickets.

Put Butterfly
Now for the put fly:

Trade
BTO AAPL 27Jul(w) 560 Put for $3.15 debit
STO 2x AAPL 27Jul(w) 570 Put for $10.10 credit
BTO AAPL 27Jul(w) 580 Put for $800 debit
Net debit of $1.05 per lot

Right now this trade is worth $3.16 ($0.47-2*$1.98+$6.65).  Your options are:

• Close the trade down and take profits.
• Let the trade run until Friday's expiration.  Your max profit in this case is $10.
• Or sell half now and let the rest run.

Notice the difference in the shapes of the P/L graphs?  With the flys, you pay a larger upfront debit for a higher profit potential.  Also note that the wider you make the peak by widening the spread strikes, the higher the debit as well.  It is for this reason that I tend to avoid butterflies altogether.  I save the pin action for the bowling alley.

Google: Short, Long, or Both?

I agree with everything Mark_Lexus says in his blog post here.  Google (GOOG) has been in a tight range since its post-ER selloff - right between the 50- and 200-day smas.  Mark suggests waiting for either an upward or downward break of that range, and then entering credit put spreads accordingly.  He generally doesn't open credit call spreads, and that works for him.

As I said, I don't disagree with his setups as his winners far outnumber his losers.  But I want to point out a few extra setups:

#1 - On a break above the 50-day sma at ~620, I would enter the same trade as Mark with credit put spreads under the 200-day sma at ~590.

#2 - On a break below the 200-day sma, one could enter credit CALL spreads with the short strike above the 50-day sma.  As you can see from the chart, there is a symmetrical triangle/pennant forming.  This is typically a continuation pattern after a big move (like the one we just saw).  The width of the triangle is ~30 points, so this would be the target in a measured move down.  Seems like a great setup, but I wouldn't trade this unless we see a convincing break with continued market weakness.  The alternate trade is credit put spreads in line with Mark's setup.

#3 - Last, and most aggressive, setup is to continue playing the current range with an iron condor.  It's up to you to decide your required risk/reward levels and place the short strikes accordingly.  The benefit of an iron condor is that it allows you to be much more generous with your strike placement, as you are essentially placing credit spreads with the same amount of margin used.

Time For Bearish Call Spreads in Mastercard?

Mastercard (MA) knifed through the bottom of the long-term wedge it traded in for nearly 6 months, and is currently below its 50-day sma.  The easy trade is to sell put spreads at or under 385.  Would give a nice buffer but the uptrend has been broken and the stock is starting to act weak.  Could be more downside coming.  Couple possible setups that I'm watching develop for June spreads.

First scenario is that it continues trading below the bottom of the wedge trendline.  Remember: support becomes resistance and vice versa.  In this case, would consider selling credit CALL spreads, but with the intent of keeping the short strike at least 10% above the stock price.  Probably somewhere up in the 470-490s, depending on the premium available.  May even look to iron condor this one if the stock starts going sideways, but long way to go before that happens.

If the stock price continues to drop, going to watch the 390-400 area as there's a base and some support from the post-Q1 earnings move.  We could get a bounce or lose it and watch that become resistance, too.

In January we had a similar fall out of the wedge only to double-bottom and get right back into it a month later.  We could have the exact same kind of move happen here too.  In that case I'd continue playing the same range as before, selling credit put spreads with the short strike under 405, if possible.

Going to let the next few days play out and let the chart tell me what to do with this one.

Trade Idea: V Credit Put Spreads

Visa (V) selling off even after beating earnings yesterday.  Been a lot of that going on lately.  Similar entry as in Mastercard (MA).  A couple long-term rising trendlines with not too much overhead resistance.  Has been putting in new all-time highs every few weeks.

Going to look at selling the 115 puts and buying the 110s.

Also check out Mark_Lexus's blog post for additional thoughts.  Note that we're both using the same strikes.  He opened a position today.  I'm going to wait another day for the non-farm payroll (NFP) data to come out tomorrow and make sure the trendlines hold.

Trade Ideas: MA Credit Put Spreads

MasterCard (MA) broke out of its several month long trading range last week.  Earnings to be reported prior to Wednesday's open (5/2).  Looking for a selloff back into the range and find support against the lower trendline.  Will try to keep the short strike below the 50-day sma at 426 in this case.

Other scenario is for a gap up and then plan to use the upper trendline (which was formerly resistance) to act as support now.  Will then be looking at short strikes around 440, depending on the premium.

For another idea, check out my buddy Mark_Lexus's blog post here.

Post-Earnings EQIX Trade Idea: Credit Put Spreads

After hours today, Equinix Inc (EQIX) is up around 10pts to ~160 after beating Q2 earning estimates.  Going to look to enter credit put spreads at or under the 50-day sma depending on if there is any premium remaining with the IV crush.  Would also prefer to stay below the ~142 support area, but that may not be possible.

Will look to see what happens tomorrow.  If profit-taking sets in and the stock looks to close the gap and it finds support there, I may be able to enter at the strikes mentioned above.

Should the stock break convincingly past the previous highs of ~161, I'd feel comfortable raising the short strike up to the pre-ER low of 145.  150 would be pushing it for me.

Trade Idea: VMW May 12 90/95 Credit Put Spreads

5/15/12
Market has been acting very shaky the past few weeks.  Not going to risk turning a profitable trade into a loss to save 50 bucks.  Could have rolled this one to June to recoup some of that, but I'd rather look for better setups.

Trade:
BTC VMW May 12 95/90 put spreads for ($0.13-$0.03) x 100 x 5 spreads = $50 paid vs. $150 premium received = $100 profit against $2500 in margin used for 4% ROI

4/24/12
Little more follow-through today with stock kissing the 50-day sma.  Entered the trade as setup below.

Trade:
Sold VMW May 12 95/90 put spreads for ($0.53-$0.23) x 100 x 5 spreads = $150 premium received

4/23/12
Following this setup on VMware Inc. (VMW) that @Mark_Lexus posted on his blog.

Stock pulled back after a 10% earnings beat last week, and following through today with the overall market down.  Hasn't quite tested the 50-day sma yet but is holding the rising trendline based on the December '11 low.  Also close to touching the lower range of the Bollinger band.  Keeping short strike below the 200-day sma at 95.

Trade Idea: IBM May 12 Put Spread

International Business Machines (IBM) selling off today even after beating earning estimates yesterday.  Will have to dig a little deeper into this one to try and find out why.  But for now I'm watching the stock to hold the 50-day sma right around 201.  If it continues to do so into tomorrow I'll look to sell put spreads with the short strike around 185.  This also lines up with the 200-day sma.  There isn't much premium in them now so I may have to move up to 190 but I'll cross that bridge when I come to it.

Otherwise if we lose the 50-day I'll look to go much lower, potentially the 50-week sma at 180.

Trade Ideas: JOY May 12 Credit Put Spreads

Been keeping an eye on Joy Global (JOY) since Mark_Lexus entered the trade here.  Hasn't quite turned out the way he wanted but he was able to roll it down and out to May.  One of the few stocks I watch that isn't reporting earnings prior to May opex.  Looking at a couple different ideas here.  Keep in mind the highest put OI for May is currently at 70, so ideally I'd like to keep the short strike below that.

#1  Considering selling some put spreads if the stock pops last week's highs of around 77.25.  At that point I may go to 72.5/70 or 70/65 depending on the market conditions at the time, and the premium I would receive.  There is also a lot of price/volume resistance above 73 (even if about 60% of it is on the sell side).

#2  Is if the stock pulls back to the 20-day sma (the dotted green Bollinger band centerline).  At this point I'll look at 65/60 or 60/65 if there is enough premium.

#3  Is to use the rising long-term trendline on the weekly chart for support.  In this case I'll most likely look to enter 70/65 spreads.

Trade: Sold HPQ May 27/29 Credit Call Spread

Update
Ended up taking the trade after the stock cooled off a little.  Right now it's at 24.85 and I got 5 spreads filled for $0.13.   Would eventually like to make this an iron condor like I mentioned below, but not going to be in a hurry to do so.  Going to let the chart tell me what to do on this one.  OptionsHouse says I have an 84% chance of achieving max profit.  Current strike peg is at 25-26.


Trade:
Sold HPQ May 12 27/29 call spreads for ($0.19-$0.06) x 100 x 5 spreads = $65 premium received


Original Post
Here is a trade I'm considering.  Hewlett-Packard (HPQ) sold off massively after it missed earnings late February.  Today it's broken out of the recent downward trend.  I'm looking at selling the May 12 27/29 call spread.  Generally I avoid call spreads but after seeing the price action in this one the past two months I'm pretty bearish in it.

Short strike of 27 means the stock would have to increase almost 8% to be unprofitable.  Not unheard of, but there is some overhead resistance at 25.  Not to mention it would also have to blow through the 50- & 200-day sma's.  It's also trading in very overbought territory right now with the Williams %R at 0.00 and a piercing of the upper Bollinger band.

That last point means we could also see a downward bounce as early as tomorrow (as frequently happens when a stock trades outside its Bollinger) and I could close the trade early or sell put spreads to make it an iron condor.

Right now the 27/29 call spread is trading at ~$0.15 per spread.