Options Trading Newsletter - Issue #180 [Options Today - Earnings Play on NVDA]
Earnings Play on NVDA...
Earnings Play on NVDA…
Checkout on Options Today below, a trade set-up on the upcoming NVDA earnings after market close on Wednesday. The trade have more than 10x profit potential.
SPX (5634)
3rd week of strong upmove into Jakson Hole event where most are anticipating for the Fed Chair to give indication that the Federal Reserve will cut rates coming September. Nonetheless, SPX had sold off around 50 points the day before Jakson Hole.
Friday, price action was initially 2 sides but the bulls had controlled the market closing strongly up 64 points for the day. Price action wise, we saw SPX filled up the upper price gap but the price action between the selldown on Thursday and the failure for SPX to close above the high of Thursday’s candle is somewhat a bearish indication. We can see that even with a rally on SPX on Friday, not all the Magnificent 7 had participated. MSFT, NFLX, AMZN, META was down with market rallying, mostly facing some form of toppish resistance.
We could see SPX coming down to fill the 5500-5450 gap area in the following weeks.
Thursday, preliminary GDP and unemployment claims. As the market had already anticipating the cut in September with over 67% probability, the bad economic data going forward will only give rise to further fall of the stock market.
Trading range for the week is 5550 to 5700.
NDX (19720)
NDX is up 202 points (1%) for the week. Similar to SPX, NDX went up initially and filled the upper gap before selling down on Thursday of over 333 points (1.7%). It closed Friday up but you can see both the upper and lower wick is long showing indecision in the market. In any case, the upper and lower price staying within the Thursday’s candle (mother bar), formation of an inside bar at resistance could indicate a price reversal. As we also anticipated since last week, price action should go up a bit more before reversing lower to fill the lower gap at 19050-19250 area.
As shown in price action of the Magnificent 7 not really fully participating in last week’s rally, gives indication of profit taking in the biggest and strongest components of NDX. Further weakness in NDX will amplify even more the move down of Magnificent 7 stocks, causing a bigger domino effect. Stay cautious in the coming weeks.
Trading range for the week is between 19450 to 20150.
HANG SENG INDEX (17612)
HSI had a pullback early part of the week, but managed to get support above 17200 level. We could see some sideway movement for time being unless HSI break above 18300 level. The gameplay is still the same, buying opportunities on pullbacks.
OPTIONS TODAY - DOUBLE BUTTERFLY EARNINGS PLAY ON NVDA
Butterfly is a low probability but high return options strategy. It is structured by selling 2 short options (put or call) and having a wing (long put or call) above and below the short options, with equal distance. Maximum profit is achieved close to expiry when the stock price is at the short put or call strike.
Normally, the trade is with a short duration and our target is for the stock price to enter into the profit zone, price between the wings of the butterfly (upper and lower boundary)
We can use Butterfly also to trade earnings due to the low entry cost. As the binary event can cause unexpected movement in stock price, any other form of options strategy traded during this period may be risky and costly due to the high implied volatility (IV).
Trade entry
NVDA is trading at $127.40 today. The expected move for options expiry August 30 is +/-$13.62 which means NVDA can move to $141.02 or $113.78.
Instead of choosing to select the full expected move, we take roughly 50% of the expected move (around $7) as we will enter the trade today instead of on Wednesday before the earnings after close.
We will take both side of the possible price movement up and down by using a Call Butterfly to capture upside movement and a Put Butterfly for a downside movement.
Call Butterfly (DTE 30 Aug)
Sell 2 Call at strike $134, Buy 1 Call at strike $131 and Buy 1 Call at strike $137. Price paid is $0.17, with a maximum profit of $283. More than 10x returns.
Put Butterfly (DTE 30 Aug)
Sell 2 Put at strike $120, Buy 1 Put at strike $123 and Buy 1 Put at strike $117. Price paid is $0.24, with a maximum profit of $276. More than 10x returns.
Trade Management
Once the price enters into the butterfly net (price range between upper/lower boundary) of either the Call or Put Butterfly, we should exit the trade at 25-30% max profit. The longer we keep the trade within the price boundary, the higher the profit. But as soon as the price gets out of the boundary, you will see the profit diminished quickly. As the trade requires price monitoring, you may want to set a GTC order for profit taking.
If the price moves out of the price ranges and the options goes out of money (OTM) no action is required on expiry. If any of the short put/call gets ITM, we need to ensure the corresponding long call/long put is also ITM to offset the assignment. Avoid single leg of the short put/short call being assigned.
OPTIONS TODAY - POSITION UPDATES SYNTHETIC STOCK ON XLU
XLU closed higher at $75.42,up another $1 from last week. We could see some retracement coming up before going further higher as interest rate comes down in the following months. Interest rate sensitive sectors like utilities and home builders have gone up with lower interest rate expectation.
If you had only a synthetic stock position, the trade will continue to be profitable. However, it would be a good idea to sell a call at the next uptick of XLU for around 2 weeks out at Delta 30. You should get at least $50-60 premium.
OPTIONS TODAY - POSITION UPDATES DEBIT CONDOR ON CRWD
CRWD is close to the profit zone. But unfortunately, the momentum have decreased at a critical point. If we are in luck, a good day could move it up into the zone above $275 and we could take profit and exit.
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