So how'd the Best Buy earnings play highlighted a few days ago work out?
Let's take a look-
The play was a bearish 1x2 put spread where we purchased 1 Sept 37.50 put and sold 2 Sept. 35 puts for a net debit around $.20. To realize the max profit we needed BBY to be at $35 by Friday's expiration. Take a look at the chart below to view BBY's reaction to earnings (click on image to enlarge).
Prior to earnings BBY was trading around $40, making the Sept. OTM put options we used rather cheap. Although BBY sold off after earnings, it didn't sell off as much as I would have preferred. Right now BBY is trading around $37.70, making the Sept. 35 puts worthless and the Sept. 37.50 puts trading around $.30. I decided today to close out the long 37.50 put for $.30 and let the 35 puts expire worthless tomorrow. With only one day left to expiration and the 37.50 puts currently OTM, it would be a gamble to hold them tomorrow and risk having BBY remaining above $37.50.
If you entered at a debit of $.20, you'd have a 50% profit. Although $.20 was the net debit used on Friday night, reality is you probably wouldn't have been filled unless you entered around .30 or .35 debit. That being the case, the trade was probably a wash (at least it was for me).
I don't tend to dabble with vertical ratio spreads too often, but based on the BBY trade I think it's fair to say that they provide a better alternative than buying puts or calls outright when making a directional bet going into earnings.
Playing It Safe in a Trumpian Tempest
5 days ago