#verticalspread

Well, it's been a while since I've posted here.  Hopefully I can be better about that, but let's admit it... I probably won't be. 

Now that we're back from Thanksgiving, Christmas, Hanukkah, New Years, etc, there's so much to talk about.  At the moment, I'm thinking a lot about the rule 'Don't trade Earnings'.  During December, Nike announced earnings, and I had a multi-week diagonal running that I had to close early because of this rule.  It turns out that the stock price barely moved and I would have been fine.  I stood to make $350 for several weeks of rolling.  Instead I forced myself to close the position early to avoid a potential $2,000 max loss.  It's hard to know what the right decision should be.

I'm facing a similar situation this week with MU.  I had a long-term diagonal that was set to expire last Friday.  It was going to expire in the money, and to just close it out would have wiped out all of my profits from the previous weeks rolls.  Instead of closing, I opted to roll it out a few months and narrowed the strike ranges from 22/18 to 21/18 for a small $.10 premium.  They announce earnings after hours today (in about 10 minutes).  They started the day up 3.5%and around 11:00 PST, they started climbing as high as 5.5% to 21.94. 

This sharp rise kind of spooked me.  I started thinking that people are going to buy in, and then if there aren't stellar earnings, they'll bail causing the price to plummet.  All of this questioning caused me to close my position.  I have a $420 profit from this diagonal, and I just closed the 5 contract position for a $.87 debit.  That adds up to a $32 loss (and several weeks of lost opportunity cost) for this play.  I just need to keep telling myself that it's the smart thing to do. 

Why do I avoid earnings?

I had a theory two years ago that I was going to make a killing in the stock market.  Stock prices tend to move on news.  You can make money when stock prices move, so if you could tell when there was going to be news, you could make a trade and profit from the move.  Predicting when there is going to be a news announcement is pretty difficult.  However, earnings announcements are set days and times, so you know exactly when the stock is likely to move.  You just need to place a bet on whether the price is going to go up or it is going to go down.  Sounds pretty simple.  

I started making paper trades and pretty quickly found that even when I picked the beat/miss correctly, the price often moved counter-intuitively. This got to be pretty frustrating.  I would pick that AAPL was going to beat the estimates, they would beat the estimates and then the price would drop.  In one case the price was up 10% after hours, and then promptly dropped 20% the following morning.  

In the options game, sudden large movements are deadly.  What I want is a stock that plods predictably upwards week after week.  When I'm picking spreads, I'm typically leaving a 2-3% cushion between the stock price and my upper strike on a Bull-put spread.  That means I can absorb a 2-3% drop in the stock price and still make a profit that week.  On an earnings day, 10-20% swings are routine.  If you're on the wrong-side of that swing, and you only have a day or two for the price to recover, you're pretty well guaranteed to suffer a max-loss. 

Last week, TSLA ran into a bit of trouble where one of their Model S's caught on fire at the end of a freeway offramp.  That, coupled with the looming government shutdown caused TSLA to drop 15% over the course of a couple of days.  

I've thought TSLA was overvalued since they hit 80.  I was hopeful that this drop was the start of a return from orbit, so I bought 5 $145 October Monthly put contracts.  If the stock price continued to drop, the price of the put's would increase and I could sell them back for a profit.

Well as luck would have it, I managed to call the short-term bottom of the stock price.  The price has since rebounded from 168 up to as high as 186.  At this point I'm staring at an $800-ish loss.  I could buy it back and close it out, but max-loss is only an extra $335, and we still have the debt ceiling debacle ahead of us.