TAKES IN THE NIGHT:
Over the past two weeks, weve examined option trading strategies aimed at minimizing volatility through earnings. We reviewed an example in (NFLX) - Get Netflix Inc. Reportwhere underpriced options laid the foundation for a positive-vega at-the-money straddle that expired profitable. We then reviewed a possible opportunity in (SKX) - Get Skechers U.S.A. Inc. Reportwhere overpriced options offered traders an interesting opportunity to sell a premium in which
There's a reason there are whole hedge funds dedicated to carrying out volatility arbitration transactions like this. These strategies are employed by some of the best option trading strategists on the street. (UBER) Report by Uber Technologies Inc.
Tony Zhang's Uber Earnings Trade: Sell $22.50 strike put options that expire on August 19th.
Uber's Chart Ahead of Earnings
Tony began his argument for Uber's short-puts with a look at the chart.
Uber's primary downtrend since February of 2021 has been quite extensive. However, what we've started to see here over the last couple of months is what we normally see near a market bottom, an inverted head and shoulders formation. This looks like it may target the $28 strike to the upside, so that's a pretty substantial move up here that we may see as an earnings catalyst.
Uber has remained in a somewhat restricted trading range since June, only trading below $20 for a matter of minutes on June 30th.
Ubers Have Increased IV in Relation to Earnings
What is even more interesting is the high implied volatility that is going into earnings. Right now the market is implying a 12% increase, versus the historical average of less than half that, of only 5.3% (over the last 8 quarters). So I'm going out to August 19th and I'll sell the $22.5 puts. These are effectively at-the-money puts that increase the intrinsic value of the option that I'm selling.
In the above statement, Tony quotes the most essential piece of the puzzle: the fact that implied volatility is pricing in a move that is more than twice the average earnings increase over the previous eight years. The average earnings increase over the past four quarters is much smaller, at just 4.5 percent.
The Real Drama at HBO Max and Discovery is Waiting for the Next Cuts
McDonald's Closes Up a Menu Experiment
Tesla's Chinese competitors have some bad news.
Smart Spreads is a powerful technique used by Chief Option Strategist Ryan Mastro to make premium collection painless.
What Is a Cash-Secured Put?
This gives me the opportunity to participate in Uber's earnings to the upside while earning some premiums which are quite substantial right now.
Warren Buffett famously used cash-secured puts as a low-cost way of collecting premiums. In exchange, the trader promises to the option buyer that if the stock price falls below the strike price by the expiration date, the seller of the put option will purchase 100 shares of the stock at a share-price equivalent to the strike price.
Tonys Uber Trade: Downside Risk and Capital Allocation
Tony Zhang's cash-secured put trade may allow traders to make a profit IF the implied gain is greater than the average earnings change. There are a few alternatives traders may also consider.
Tony Zhang's cash-secured put trade requires a collateral of $2,250 in exchange for a credit of $0.91 (at the most recent price). From has a negative risk/reward bias.
While Uber's 52-week low might provide support, another possibility is that a poor earnings catalyst sends this stock down the floor (like happened last week with (ROKU) - Get Roku Inc. Reportwhen the stock broke below its 52-week average). If you are in a trade that isnt risking a lot of money, that isnt a big deal. If you are in a position where you are risking more than 24x the maximum possible reward, then it might be problematic.
Short Iron Condors: A Potentially Safer Solution
Many of these issues can be corrected by using a short iron condor strategy. If we, like Tony, believe that Uber's 52-week low will provide some support, we might sell the $28/$29 call credit spread on August 5th, which would collect a maximum premium of $0.10 ($10).
Uber's stock is currently trading at $23.94, making the maximum profit range of more than 17% to both the upside and the downside more than 3 times the average earnings move. The trade also exploits key areas of support and resistance. In the worst-case scenario of this example, the trader loses a maximum of $77 dollars rather than $2,250.
Every week, check out Time Bandit Options and learn how to master the Iron Condor with two professionally crafted trade ideas from a licensed CMT.
To find pockets of probability like this, be careful when trading iron condors, cash-secured puts, or calendar spreads.