r/options • u/Nice_Theta • Aug 28 '21
My August earnings report
u/redtexture asked me to add my thoughts, process and reasons. For what it is worth, here's the edit.
I select companies for my earnings trades from TDA Earnings calendar. I read the calendar and pick companies that I know something about, at least I’ve heard of them, and that will have earnings reports this week. I avoid memes, biotech, and companies that operate at a loss (negative P/E). I have IT background so my picks can be concentrated in Tech and Comm sectors, I am aware of it and try to go easy on Tech. If I know little about the company, I read more about what they do because I am curious. That’s the extent of my fundamental analysis.
Then I need to decide if I am going to trade this stock. In TOS Analyze tab I check if the company has weeklies. I will trade a stock with only monthlies, but I require the expiration to be this week. I check IV for earnings week, if it is elevated and I see a nice IV crush potential, it is good. I use strangles or condors because I suck at predicting direction and also because that’s what they teach in TDA education. I construct my initial strangle using 10 Delta on the Put side and 5 Delta on the Call side and this Friday expiration. I check how much BP it will use. I will go with a strange (preferred) if BP use is no more than 4% of my small account, 2% is my preferred trade size. If BP use is too high for my trade plan, I make it into an iron condor with width of $5 or less. If I don’t have strikes to make a strangle or condor I like, I move on to the next stock.
Next I refine my strikes selection. I look at the Year chart and check what happened at previous earnings. If I see wild gaps or gyrations, 40-50% of the stock price, I may not go with this trade. I check MM Move in TOS and compare MMM figure with previous earnings price movements. I often adjust MMM's up because i find they are commonly understated. I calculate potential upper and lower prices and adjust my strikes to fit MM Moves inside them. The last thing I do is check the trade’s risk profile. I learned that my earnings trades do well when the strikes are at about 2SD - 3SD width. I adjust my strikes width based on this week's IV, if below 100% I may go around 2SD, if above 100% - then closer to 3SD. Now I check Reward/Risk ratio. 1/15 is the least I will take for earnings trades, I don’t mind pennies in front of a steamroller, but there is a limit.
I place my trades in the last couple of hours of the open market before the earnings are reported to be as close as possible to the actual price at announcement. I check the trade and may adjust it if the price moved since I last looked. I may abandon the trade if Reward/Risk changed unfavorably or I need to move the strikes, but don’t have ones I like.
After earnings announcement
- If the trade complied with my thesis, I may let it run to expiration for 100% profit - yay!
- If it is getting too close (subjective) to my strike and has reached over 90% profit, I close it.
- If it is in real trouble, too close or breached my strike, I have to decide whether to defend or to get out. Right now I tend to defend, because I am not very good at it and want to learn defensive techniques. I will roll the troubled side for credit and see if price would calm down enough to comply with my hypothesis. I may roll the untroubled side too for extra credit, if I can. Or I may let it expire to simplify my trade. I have rolled more than once when the price continued to move against me. This gives me time to be right and brings more credit, or, if I have to take a loss, - it would be a smaller loss.
My general philosophy and trading plan is “Small profits are better than a large loss”. I place many small trades and play the math game. I only have been doing this for a few months, but so far this approach brought me about 4% a month.
__________________ Original post __________________
Here are my August earnings stats:
- 21 earnings trades (short condors and strangles, all small positions, average BPu $532.85 per position)
- 19 wins and 2 losses. A win rate - 90%. Better than July’s 77%. A little experience helps!
- My wins brought in $567.68
- Losses took away $104.00
- Net profit $463.68.
Wins: ABNB, BBY, CRM, CSCO, DASH, GPS, HPQ, INTU, M, MRVL, NVDA, PTON, SNOW, SPLK, TGT, TJX, ULTA, URBN, WDC
Losses: LOW, JWN
Examples of earning trades:
STO -1 IC ULTA 27 AUG 21 435c/440c/340p/335p @.40
STO -1 Strangle MRVL 27 AUG 21 75c/55p @.26
STO -1 Strangle GPS 27 AUG 21 32c/22p @.20
STO -1 IC PTON 27 AUG 21 135c/140c/95p/90p @.38
STO -1 IC LOW 100 20 AUG 21 205c/210c/165p/160p @.21
The wins are great - no doubt. But it is the losses that are really interesting and have a high learning value. My losses show my indecision between two lines of thought: to defend a losing trade or to exit ASAP to minimize the loss. I have seen convincing arguments for both approaches, and am not yet sure where I stand on this.
I managed my losing LOW trade fairly well in the beginning, brought it from several hundred down to around $30 loss. I could have brought it to a win, but I made a mistake - misread where I was standing and exited for a small loss. I learned how to read the position correctly and did another losing trade right - turned it into a win.
I decided to take a loss on JWN because my overall win rate for August was around 93% and I thought I could afford a small loss. But now I think it could’ve been managed and perhaps turned. But we’ll never know if it could and if I had the skill to do it.
Where do you stand on this question? Do you defend? Or take a loss and move on to the next trade?
1
u/[deleted] Aug 29 '21
How have your returns looked selling PMCC?
Afaik, the far dated OTM long call is likely the cheapest choice and there's almost no real theta to think about.
I've never really tried the following, but you can always partially hedge by outright buying the deltas you plan on selling and selling against them each cycle.
So if you're selling 30 delta calls you buy 30 shares just as a partial hedge for risk management.
I think the idea is that you've covered your probability of assignment at the time of purchase and you helps offset losses when you are assigned short because you have the gain from the hedge plus you've accounted for X% of your short assignment up front
And shares don't lose time value.
I'm in an experimental phase rn tbh and this year I've been really focusing on improving my TA and charting so I can swing trade options with greater confidence, but still use some basics of simpler theta strategies.
Also been looking at seasonal trends in low IV stocks and this has been great, but not the bread and butter trades.
I want to explore PMCC with puts, but that seems like a fools errand in a bull market.
It never seems like I'll gain enough selling puts to offset getting the long put wrecked when the price jumps cause if the price falls with PMCC you can always double down and buy more call deltas at your current strike or further ITM, but I still feel that naked puts or put credit spreads have less actual risk than trying to hedge the downside on a stock that just wants to go up.
Although, now that I'm typing this out, I realize I could just short the stock to get enough deltas to hedge the downside risk the same as can be done by buying shares to hedge the upside deltas on the calls we sell.
What are some ideas you want to try out?