July 18, 2016 at 2:26 pm #6454Steven PlaceKeymaster
For nearly 3 months the stock has been stuck in a range between 35 and 38.
The company is shopping itself around for potential buyers but there hasn’t really been any newsflow with that.
If we take a look at the implied volatility, it’s actually quite subdued. Nobody is buying options expecting fireworks into the event.
Average move after earnings tends to be around 5%.
Now the weekly straddle is at 1.70, with a strike of 38. That means the price over strike is 4.4%, so it’s coming in just a little light. On its own, it wouldn’t be a crazy buy but it’s possible.
But let’s go a little further out…
The Aug monthly (19 Aug 16) straddle is going for 3 bucks.
So think about this. If you buy the weekly straddle, you get 4 days’ worth of price action for the cost of 1.50.
If you buy the monthly, you buy 30 days’ worth of pricee action for 3.00.
To me, buying the weekly straddle makes a lot of sense.
Here is the trade:
IncomeLab Order Ticket Type Asset Duration Strike C/P BTO YHOO AUG 38 Call BTO YHOO AUG 38 Put Total Debit: 3
Here’s the risk:
And here are the breakevens going into opex:
Now here’s what I’m going to do for the execution.
I know that I could be wrong and that the stock could not move at all and the option premium could tank… but how low can it really go? The IV on this straddle is around 30%, and I would expect the IV to drop at most 5%.
Nevertheless, I’ll go in half size here and add if no movement after earnings.
I’ll also have scalping orders on the stock.
1. BUY TO OPEN YHOO @35
2. SELL TO OPEN YHOO @40
For sizing, you want 50 shares per straddle.
So if you buy 10 straddles, you want to trade 500 shares on these.
Make sure to use GTC_EXT Limit orders.
If you get filled on any of the stock trades, then be ready to close them if YHOO reverts back to 37.80
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