Last week I got trapped in an earnings trade with a rather large spread. I haven’t placed too many earnings trades this season given the market dip, then historical rebound.
With that said, I can't seem to pass up earnings trades on high dollar stocks like AMZN and BKNG. Often you can sell very low deltas and still pull in a lot premium.
Of course to sell naked options in a high dollar stock requires a ridiculous amount of margin. I also wouldn't be able to hold the underlying if I were assigned. So I only place these options trades for the week of earnings and I try to buy far out of the money options to effectively create a very wide iron condor.
The combination limits my margin requirements in both amount and duration.
BKNG Earnings Trade
After earnings BKNG dropped nearly 10%. Arguably not a huge percentage move this earnings season, but it was a high dollar amount and moved just past the puts I sold.
I rolled these to the following week to allow BKNG to recover as I thought the move down was over done. I also pulled in more premium.
During the week the BKNG rebounded as I had anticipated. However, it now challenged the call side of the iron condor. This prevented me from buying back the put side.
What to do in these situations is always a challenge. On one hand, if BKNG stays higher, then I'll at least pull in the remaining premium from the puts as they expire worthless. On the other hand, this is a chance to close the put side for a profit.
By the end the week with the tiny market pullback BKNG fell to below the put side again. While I may have been able to take these off at the end of the day for roughly even or a small loss, I decided to roll them again another week.
Moving forward I believe legging out of options trades in these high dollar stocks is the right move. The high dollar amount means even small moves keep the options premiums elevated. This makes it impossible, even at expiration, to close the position near $0.00.
There were multiple opportunities last week to buy back both sides of the trades for less than $2.00. As BKNG was low at the beginning of the week, I could have legged out of the call side. When BKNG moved higher Wednesday and Thursday, I could have closed the put side. Again, Thursday afternoon I could have closed the position in full for a profit. And Friday I could have closed the call side for pennies.
This wasn’t necessarily seeking perfection. There were multiple opportunities to leg out of each side of the options trade. In fact I did close the call side Thursday afternoon for $0.60. There were also times to close the full position for an overall profit.
So the new plan is to allow BKNG a few days to play out. By Wednesday I will look to leg out of the unchallenged side. Then use the last half of the week as an opportunity to takeoff the opposing side.
While there is risk in the stock moving well past one side, I have mitigated that by the amount of premium I have taken in so far. In addition, I could always turn the iron condor into an iron butterfly or again roll the positions. So there is plenty of optionality and the benefit of legging out means turning a $1000 loss into a $1000 profit.
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