Sunday, June 28, 2009

APOL Earnings

Although Alcoa's earnings is set to kick off the "official" earnings season next Tuesday July 7th, we still have a few announcements trickling in pre-Alcoa. Besides RIMM's earnings last week, the pre-Alcoa earnings calendar seems to be bereft of any big hitters. On the docket tonight Apollo Group (APOL) seems to be the only one worth mentioning. Matter of fact, APOL received some face time on Friday night's Options Action where they compared a short strangle vs. an iron condor play going into APOL earnings. APOL realized volatility has been languishing over the past few weeks as 30 day HV sits at 39% and 10 day HV at 37%. The pre- earnings options bid up has driven IV up to 55%.
As mentioned in Off the RIMM, options typically get a pre-earnings bidup that causes them to trade at a significant premium to HV. Once again the 64K question is whether or not the options are overpricing or underpricing the uptick in realized vol that is bound to come due to the post earnings gap. Assuming a trader is wanting to fade the increased implied volatility (e.g. short volatility) into the earnings, let's explore two possible strategies.

Short Strangle
APOL currently sits around $66.75, so we could construct a July strangle by shorting the July 60 put and 75 call.
Sell July 60 put @ $1.05
Sell July 75 call @ $1.10
Net Credit = $2.25
Upper Breakeven = $77.25
Lower Breakeven = $57.75

Shorting a Strangle is one of the purest ways to place a short volatility bet. The theoretical unlimited risk can be a tough pill to swallow for most traders. However, it can be partially mitigated through proper money and trade management (e.g. don't bet the farm on this type of trade!)
A more conservative approach may consist of playing condors instead.

Iron Condor
Sell July 60-55 put spread @ $.77
Sell July 75-80 call spread @ .65
Net Credit = $142
Upper Breakeven = $76.42
Lower Breakeven= $58.58

The obvious allure of the Iron Condor is its inherent limited risk. However, it does require giving up about $.80 of the credit you would have received from the short strangle, plus paying two extra commissions on the long call & put. Whether or not it's worth the extra cost to limit the risk is up to you.
Follow me on Twitter.


Tim Justice said...

Played the short strangle on APOL (and gave you the heads up on it last week! Should have listened my man) up a clean 8 % on BPE of this posting....


Tyler Craig said...

lol... nice trade. and I did "listen"- played the condor instead of short strangle. Closed the put spread for $.70 profit at open yesterday. The call spread is currently up about $.15. Were I to close now that would be a 23% return (85/358).

Tim Justice said...

I'm loving this model....still debating IC's vs. SS's....tough debate.

1option said...

Nice play guys! I wish I had been home to take this position on!

Tyler Craig said...

yeah, it will be interesting to see how the model plays out with a larger sampling size & in a lower volatility environment. So far(at least for me) for RIMM and APOL, the short strangle would have been the better play.

Thanks 1option- I liked your post on Index options vs. ETF options.

Wade said...

Hi Tyler,

Great blog. I was wondering what software you are using to show graphs of your short strangles and to show the profit and loss zones?This is on your June 28th post.

I have just started to get serious about this style of trading. Your blog is very useful and informational.

I have been using mostly iron condors's and calendars to capture theta.

I usually put positions on 30-40 days before expiration and just collect the theta as time passes. Usully on SPY, QQQQ, EEM, IWM, QID.

I don't like the unlimited risk on strangles right now.

Tyler Craig said...


Thanks for the question and I'm glad you're enjoying the blog- Feel free to use the labels and options terminology on the left side to access archived posts that may be of interest.

The software I use for charting and risk graphs is the EduTrader.

I use SnagIt to copy the risk graphs and SnagIt Editor to shade in the profit and loss zones.

Happy Trading-

Tyler Craig said...
This comment has been removed by the author.
derivativesNYC said...

try Double Diagonals or Double Calendars