Jenny: (Singing) Hi, everyone. Welcome back to the Liz and Jenny show, this is Know Your Options.
Liz: I love the music. It was awesome. Know Your Options. We are going to talk about earnings trade management. In particular, Whole Foods and Tesla.
Jenny: We've got a handful of earnings trades. We're going to talk about managing those, what we do, and we're also going to clean up- Are we going to clean up our account right now?
Liz: In trade small, trade often.
Jenny: Trade small, trade often. This is earnings trade management. People put on earnings trades, and I guess more importantly people want to know, if I put on an earnings play, how do I manage it or what do I do, when should I be looking at this. We usually manage earnings trades right on the open.
Liz: Ideally, in a perfect world, I want to put my earning trades on at 2:30 and I'm taking them off at 8:30 and 5 seconds. In a perfect world.
Jenny: Sometimes it works out for the better if you would have left them, but sometimes it doesn't. We're just consistent about it. We manage them on the open. They're earnings plays, the move it out, it worked or it didn't and we're usually out right on the open.
Liz: Yeah, typically we are. When we say out, that's why I'm saying in a perfect world we sell premium at 2:30, we buy it all back in at 8:30 and walk away and trade the rest of the day with a smile on your face. That's a perfect world.
Jenny: If we made money-
Liz: If we made money, exactly.
Jenny: If we made money we're out, if we lost money on it, then we're with it for a little bit longer.
Liz: Then we role up our sleeves and we manage this trade.
Jenny: Like Tesla this morning, I made money on it, closed it. By this point I would have made a little more on it, but-
Liz: Would of, should of, could of.
Jenny: If you made money, we're out and we're not fooling with it.
Liz: Right, exactly. That's really what we do look at with our earnings trades. That being said, in my perfect world scenario, that doesn't happen that often. It happens and I'll take the little bits of profit, but when we're left with something to manage, we do. Let's take a look, I don't think we have anything particularly troublesome in there today.
Jenny: No. Here's Whole Foods Market. We played it to the downside, we were bearish. What have we lost here? We've made a dollar.
Liz: I think we should talk through these types of trades. I like these types of trades for earnings. This was an interesting trade because there was an assumption that typically we don't have. The so what now among the stock is something we did not want in Whole Foods. We created a scenario with a broken wing butterfly that we put on for a credit.
Jenny: It was a bearish trade. Our strike right here, our short strike, we wanted Whole Foods to go down to our short strike, which is the 50. That's our short strike. We wanted Whole Foods to go to 50 and Whole Foods is at 56, so we were wrong. It didn't go down, it went up.
Liz: What was the expected move?
Jenny: $3 and it was trading 53. We put on the 50 as our short strike and it went up $3 to 50 cents.
Liz: We had talked yesterday about expected moves and earnings. Our typically understated, overstated. This was a zig zag move.
Jenny: Yeah. It was $3 and it moved $3.
Liz: I like trades like this where, did we make any money on it? No. Did I lose any money on it? No.
Jenny: Did we have to do anything to it?
Liz: No.
Jenny: The reason we do the out of the money is because if we're wrong we don't have to close it. We don't have to pay commissions to get out of this, we just leave it. We collected a dollar or 2 to do the trade and we just leave it. Everything's going to expire.
Liz: Now, just to keep dwelling on this Whole Foods because this is a good lesson. I just want to make sure that that's very relevant here. We always trade the out of the moneys because of this. This does not require management. We also, when looking at these, I don't like to pay anything for them, at all, because of this. If you pay something for this, then it becomes a low probability trade.
Jenny: This is why we're not going to do anything with this. We have 1 day until expiration, these options are worth nothing, we can't get anything for any of them, and this trade is only tying up $150. If we had something in here where it was tying up $1,000 or it was tying up $10,000, if we had some element in this trade that was tying up a lot of money-
Liz: We'd close it.
Jenny: We'd close it.
Liz: Absolutely.
Jenny: Because it's only tying up $150, and it has 1 day to go, these option are worthless, we'll leave it.
Liz: Absolutely. Right, so that's a very valid point. This is all about, when you think about capital and this was a cheap trade. If we close this right now, we'd be at a loss instead of a win.
Jenny: Right, because it would cost for each of these options to close that.
Liz: Right.
Jenny: So that's Whole Foods Market. Now we have Tesla.
Liz: It's so funny. I'm just happy we didn't lose money in Whole Foods Market. I think the guys knocked it out of the park with their earnings trades this morning.
Jenny: Oh did they, Oh because nothing really-
Liz: Nothing moved.
Jenny: [Buydo 0:05:09] didn't move that much, Tesla didn't move that much. Let's go to the trade page and take a look at Tesla. The expected move in Tesla was I think $18, does that sound right?
Liz: It was 17, it was down 13. Everything's under it's expected move. As premium sellers, we're in pretty good shape.
Jenny: We didn't want to take a ton of risk in Tesla so we put on a tighter iron condor where we risking too much. You can see right here, the 1 iron condor which was tying up about $260, $260 we were at risk. We made, right now, $173.
Liz: Okay, now, just because I think everybody should see this. Are you going to leave this?
Jenny: No, I'm going to close it.
Liz: People look at say, "I could have made- It was 250 we were down-"
Jenny: You can see.
Liz: 241 was our maximum profit on this, so $241 was our maximum profit. We can close it and take 172 off the table.
Jenny: We're giving up 40 cents. 40 cents is what we'd have to give up to buy back the put spread. We're giving up 40 cents. If we leave it and it ends up in the middle we'd make 40 cents more, but we'd risk the money we've made. I'm not going to risk my $170 to make 40 cents. I'm closing it.
Liz: When we look at the capital we've put up for a trade, we put up, in this one we put up $260. That's all the capital required to put this trade on. I'm closing this. I think that is the biggest mistake people make, is leaving these on to get their extra $40.
Jenny: Something else I want to point out about this Tesla trade, we get questions, people will here us say, "I'm just buying back my short, I'm just buying back my short." That's not the case here with the puts. As you can see, there's 20 cents in value in our long, 60 cents in value in the short. Look at those calls.
Liz: I'm so glad you brought that up. Together as a package, I want my $20 back from that long.
Jenny: On the put, for sure we're going to close that. If you look at the value on those calls, the short call's 3 cents, the long call's 2 cents.
Liz: We don't live in a fee free society. That's just the nature of what it is. If you are looking at this and you are going to pay to close that which is going to mitigate it by a dollar. What we do in this scenario is only close our short call. We buy back, we pay 3 cents, only 3 cents and buy back that one call.
Jenny: If we did it as a package, maybe we can get filled for a dollar or 2. We'd have to pay something for it, so it'd be a dollar or 2.
Liz: We're paying $1.50 in and out.
Jenny: We're going to be paying $1.50 commission.
Liz: In commission on each contract.
Jenny: We're only going to close our short, because when that long has 1 or 2 cents in it, it's not worth fooling with. We're just going to leave it.
Liz: Now that being said, for newer traders, close them both and don't fool with it. This is a trick we learned. It's just commission rates. Then, I'm not saying this is ever going to happen, but your long-
Jenny: Sometimes.
Liz: There's a possibility if something happens that long could come into play. Maybe not be worth a ton, but be worth $10 or $20, something. We will have a tendency to buy back our shorts. If it makes sense financially to buy back our shorts. That being said-
Jenny: If our long has 5 cents, 10 cents, we're closing it, but if it doesn't have anything, we'll leave it.
Liz: Right, that being said, what that does, say we close this put spread, and say we just buy back our short and what we're left with, this. It really messes with the probabilities of our account.
Jenny: It changes the PNL. What was $170 winner now looks like $130 loser because all we have on is the put spread and that long call. You just have to understand.
Liz: We're taking off that put spread.
Jenny: I know, but it's still going to show a loss. We're going to take off this put spread, and we took off our short call.
Liz: I know in Doe you can look at your probability of success on your entire account, and this will really mess with them. That's why you can kind of move these, they created where you can move these and they don't take into account. This will significantly bring it down. I'll never forget the first time I logged into Doe. I had a negative probability of [inaudible 00:09:31]. I was like, "What is going on?" It was my residual options that were bringing everything down.
Jenny: Often times we're left with residuals if we have a calendar that didn't work out and we're left with our long, it doesn't have much value. Or leave something like this and we have that long so it brings down your probabilities.
Liz: We're probabilities traders and our accounts have a higher probability of success. This is just cost effectiveness.
Jenny: Now we have this Tesla position. All we have left is that one call. That's when you say, "Oh, down $198 on the open, that's only that 1 call." If you get confused and you're like, "Why am I losing on that?" You could always- I will always go into my account statement and see, "All right, what have I got going on here? Where's Tesla?" Here it is, we've got Tesla up $184. That's what we made on the trade.
Liz: Sorry to get off on a tangent here. We've been trading 1 lots since January on this account, what's our biggest-
Jenny: We've been trading 1 lots since January, so about a month.
Liz: We just think it's fair, because we want to show people how to take them on and put them off and 1 lots seem to make sense. Don't get me wrong. We trade small, but I trade bigger than that in my account. I just want to see what our biggest winner is in here.
Jenny: Here's something. Our biggest winner, let's look. I'll find the biggest winner for you, Liz.
Liz: Where's the year to date payout?
Jenny: 409 and that's IBM.
Liz: IBM?
Jenny: Yeah, so looks like our biggest winner year to date is 409, oh no, IWM.
Liz: Big lizards.
Jenny: That's the big lizards. Separate from that, which I think is really important [crosstalk 00:11:12].
Liz: Just to answer a question, scroll down. I want to show somebody Boeing. Somebody had asked where our Boeing strangle was. We had a Jade Lizard ask. We capped our losses.
Jenny: Because the call was so cheap, the call was 25 or 30 cents, we bought a call to cap our loss. That was on the earnings trade. Then we have done a poor man's covered call.
Liz: Since that we've done a poor man's covered call, but they were asking where our original strangle was. We had a Jade Lizard ask type trade where we had bought the call.
Jenny: Remember, we looked, and we said, "Hey, that call is 30 cents. I'm going to buy it because, you never know, you never know."
Liz: GLD is our biggest loser.
Jenny: Is it? That's funny.
Liz: GLD and Netflix. Netflix, that chicken.
Jenny: That's interesting, you know, because Gold has done well for us. Netflix, that chicken and Netflix. What happened? Where am I?
Liz: What are you looking for?
Jenny: Where did it go?
Liz: You have to tell me what you're looking for.
Jenny: We had our year to date PNL and where did it disappear to?
Liz: Oh, I don't know. That I don't know.
Jenny: I don't want the selected totals, I just want everything. It's giving us everything.
Liz: Oh, yeah. It's whatever you're selecting.
Jenny: It was giving whatever-
Liz: There it is.
Jenny: No, but that's only giving us XRT.
Liz: No, isn't that it right there, that 14?
Jenny: No. That's just giving XRT. I'm going to hit all.
Liz: We can look through that and figure it out.
Jenny: I thought it was a really good example of, here we've got- Here we have it. We have 1 lots. Consistently tying up 10 to $15,000.
Liz: We're trying to be realistic with people's accounts.
Jenny: We have 1 loss consistently tying up, here's the margin required, 10 to $15,000. In 1 month we're up $1860.
Liz: You'll notice. Watch this. This is slow and steady wins the race. This is small wins. Don't get me wrong, we lost $250 on Netflix, things like that. It's small wins, it's taking those profits that gets you to that percentage.
Jenny: We are out of time for this segment.
Liz: Oh, okay.
Jenny: We'll be back with, what do we have coming up? Trade Small Trade Off.
Liz: Trade Small Trade Off, so stay tuned.