Jenny: Hi everyone. Welcome back to the LIZ & JNY Show. This is Know Your Options.
Liz: We're going to take a look at Facebook's earnings right now, just on the heels of kind of what we went over with You've Got Mail. We're going to go through our checklist. Facebook has earnings tonight. It's on Jenny's calendar right next to gymnastics.
Jenny: Speaking of having a calendar, yesterday I showed up at ballet and my daughter is like, "Where are all the kids? Are we late, Mom?" And I'm like, "I don't know what's going on, Lily. I don't know where everyone is. Maybe there's no class today." We were at ballet at the time soccer was supposed to start, and at soccer at the time that ballet was supposed to start. All hell broke loose last night.
Liz: I've had days like that where you don't know if you're coming or going.
Jenny: It was crazy. Crazy.
Liz: Yeah, I showed up at ballet an hour and a half early once as well.
Jenny: Did I tell you about the school books last week?
Liz: Yes.
Jenny: We'll quickly get to Know Your Options. My son got home from school in such a rush to play, set his books on top of the car, went out to play. Later my husband left and went to a meeting, drove away, and the books were a block away.
Liz: Strewn around the town. We laugh. All books were recovered and nobody was hurt in this.
Jenny: All right. Now to work. This is Know Your Options. We've got lots of earnings. We're going to use Facebook during this segment. We're going to walk through our earnings checklist of how we know if we should trade this product or not.
Liz: Checklist. Facebook is on our personal calendar that it has earnings, so we check the date. We would go to earnings whisper, we would type it in, and lo and behold, I believe we have confirmed it.
Jenny: Yeah, earnings whisperer. Type in F-B. It tells you earnings confirmed, 1028, after the close.
Liz: Now the other thing that we can look at here, too, is we can see these October with 3 days left about an 80 - Well, that's not next. Let's go to the next one.
Jenny: All right. What's next?
Liz: Number 2. IVR.
Jenny: Well, and number 1 before anything, make sure it's liquid products. When you find something, you're going to list lots of earnings, and most products on that list won't be liquid. When we're looking for a liquid product we're talking about is the distance between the bid and the offer, the bid in the ask, is it tight? Here we've got this 81 call. 2.69 bid at 2.72. Three pennies difference between the bid and the ask. That's a tight market. Volume 22 million, this is a liquid product.
Liz: This is a liquid product. Just for teaching purposes, type in win and just look at the volume in this. You can tell right away a liquid product versus a non-liquid product. The volume in it goes down to 567 contracts and you'll notice, like this 1.82. 3.20 at 3.45. That's actually pretty tight right there though.
Jenny: These weekly's are a little bit tighter. Probably because there are earnings -
Liz: That's what we mean by liquid product. There are two ways to check. We check the bid ask and then we check the volume. That being said we don't do it very often. Once it's on our list, I know Facebook is liquid so I skip over that step.
Jenny: We skip over that step because we know it's liquid. [inaudible 00:03:51] I just want to make a comment about the volume here. We've talked about Wynn and Wynn moves. We've seen it have crazy moves. The volume in Wynn is not that high. There are 500,000 shares of Wynn here traded today and it was 22 million shares of Facebook has traded and I think that's what causes Wynn to have whippy moves.
Liz: The funny thing is, I know Jenny you trade Wynn quite a bit and I feel that once it's on your watch list you'll know a little bit more about it. I didn't realize that Wynn was not a liquid product until you brought it up today. That's okay because it's something that I would have double checked but I did not really pay attention to it being a non-liquid product.
Jenny: No. There's a difference between Wynn who has 30 cent markets and something like [crosstalk 00:04:41] Only because I know. Here we've got the …
Liz: That's still 30 cent wide.
Jenny: 125 call is 4.40 at 6.40. You've got this, this is something we would never trade. When you see a market that's this wide.
Liz: This could throw people off because you look at the 2.05, 2.40.
Jenny: There must be resting order in there.
Liz: The 1.10. That's a resting order, that's the colored ones.
Jenny: Look at this call. 60 cents at $1.35.
Liz: Right. That's what I'm saying. There are checks and balances for a reason. It's not always the type it asks. It's kind of in conjunction with each other and then getting to know the products.
Jenny: Yeah getting to know the products. It doesn't take that long to learn. You go through one earning season. You make a handful of earnings plays. Well now you've got those on your list and then next season you add some more. Earnings come four times a year and time flies. Before you know it will be next earning season.
Liz: As options traders we are always month out in the future. It's Christmas already [crosstalk 00:05:42].
Jenny: We know Facebook has a tight market so it's a liquid product.
Liz: Okay.
Jenny: Check!
Liz: Number two. We know it's a liquid product, then we check the IVR. Implied volatility rank.
Jenny: We can check that down here under today's options statistics. The IV percentile is the IVR or the IV rank. We see that's a 43 so hey we want a high IV rank. That's not high.
Liz: Right, we want a 43 and this 43 is based on a 43. The 43 IVR is based on a 43.39 implied volatility.
Jenny: We know that we wouldn't sell options that had a volatility of 43.
Liz: Because it's under 50% but let's take a look … Now we can take a look at the actual individual cycles which is number three on the list.
Jenny: Look at the individual cycles. We've established that an option chain with about a 40, 43 implied volatility is too low. We're not going to sell these.
Liz: [crosstalk 00:06:45] We're not going to sell the Nov.
Jenny: We're not going to sell these.
Liz: Because it's too low. You will notice in some binary events and some products that high rank will filter down five cycles. Here not so much.
Jenny: We're not going to sell those. Are you going to buy those?
Liz: Hell, no.
Jenny: We're not going to buy those.
Liz: I don't ever buy.
Jenny: I know. We don't buy options. Sometimes I'll test it out. I'll say, "Oh, the Val is supper low. Let me test this and buy this, this." It never works.
Liz: Never.
Jenny: Just for research purposes.
Liz: For the good of the people. Now, we know. The only two option chains on the board that meet our requirements are the October with 3DTE and the October with 10DTE.
Jenny: I mentioned before, you might have the date, "Oh, I think earnings are coming up further today." If you don't see a difference like this, see we've got 86% implied volatility in these 3 day and then it drops down, and then it drops again, and it drops again. If you don't see that then maybe that's a red flat that maybe there aren't earnings.
Liz: If you don't see a stair step.
Jenny: Yeah.
Liz: Or if you do see, I know this is kind of whippy. If you do see say a big jump on these November 17s, check your earnings date.
Jenny: Right. If this is 50 and then this is 80, well then you probably got the wrong earnings date.
Liz: Exactly. That's a red flag that you've got the wrong date.
Jenny: Yeah. For earnings or not. Any type of binary event. We had this come up in Yahoo. When Yahoo had that binary event coming with Alibaba and people were trading the wrong cycles because didn't know where to look to find the inflated options.
Liz: Exactly. The IVR rank is information. You need to kind of know where it's coming from and make sure that you're using it accordingly.
Jenny: The long and short of it is, the higher this number is in the right hand column the more expensive those options are. Maybe not overall more expensive because with more time they're more expensive but it makes them worth selling the higher that number is. I'm not going to sell the 41. I'm not going to sell the 45. I'm not even going to sell the 49 but I'll sell an 86.
Liz: Exactly. Exactly. A 57 is okay too but we know we like the 86. Now number four on that checklist is make sure there is premium in the options.
Jenny: Alright well we've got this box up here that tells us the expected move. It's about $5. What I look at is, if we go $5 down is there anything in that option? $5 down that option is $1. $5 up that option is $1. Yeah, there is enough premium in those options.
Liz: Absolutely. Typically if I'm going to open something up in the rank you can see when there is no premium in something. I'm not going to sell options in something and get 20 cents, 30 cents.
Jenny: Yes.
Liz: Unless it's Zinga.
Jenny: What you risk in Zinga, it's a $2 product. Here's an $80 product. We're not going to take risk for 30 cents, 20 cents. Realize there is risk in selling options. It pays out over time. There are high probability trades, but there is risk in selling options. You may want to define your risk if you are a newer trader, or maybe that's just your style. We've got to be paid to take the risk.
Liz: Right. That's exactly it. We want to be paid to take the risk.
Jenny: Mm-hmm (affirmative).
Liz: Okay.
Jenny: Now, we've got that long list of strategies and we can choose a number of them.
Liz: Off that large list of strategies, if you go through your checklist I don't think there is anything wrong with anything.
Jenny: With any of them.
Liz: With any of them. It's just kind of your own personal preference and your own personal risk tolerance.
Jenny: Yes. They all have different risks. [crosstalk 00:10:15]
Liz: Different capital requirements. You can define your risk and sell. You can get closer, you can get farther. There's lots of things on there. What seems to be our big winner this earning season and we've done so many of them is the Big Lizard.
Jenny: We've done Big Lizard's for durational trades. We haven't necessarily done Big Lizard's for earnings too much because that means we believe that it's not going to move that much.
Liz: Or we're collecting over the amount because if the straddle is 85% of the value and we're buying something we've defined our risk. In this scenario we collected over its amount.
Jenny: Yeah, we collected just $5.
Liz: No, we collected …
Jenny: 5.05
Liz: Oh, $5.05 okay.
Jenny: Understand, when you're selling a straddle that's 15% more than the expected move so you're giving yourself a 15% buffer. If we're doing the Big Lizard and buying a call we're giving up that 15% buffer and we're just getting to the expected move.
Liz: Now, Big Lizard has an assumption built into it.
Jenny: Yeah. Big Lizard is if you think there's not going to be much of a move or you're nervous about the upside.
Liz: Or, you think there is going to be a giant upside move that you don't want to lose money in.
Jenny: Facebook we could have just sold a strangle. Sure. We could have just sold a strangle.
Liz: You will get more by just selling the strangle than buying something. You straddle, I mean … I'm sorry.
Jenny: If we sold the strangle and went $5 up and $5 down we could see we get $2 for that. $5 up $5 down we get $2 on that strangle.
Liz: If you're $5 up and $5 down your out of the way of the move in addition to the $2 so your break evens are 73.05 and 86.95. 73 and 87 so to speak are your break evens and that's out of the way of the move.
Jenny: Out of the way of the move. That's the strangle. We went with the Big Lizard only because I said to myself -
Liz: [crosstalk 00:12:20] Self?
Jenny: Self. If Facebook drops down I don't mind owning it and if the earnings are good I'm a little nervous of how high this could go.
Liz: Based on knowing you can sell premium and then coupling it with an assumption.
Jenny: Right. If it runs too high I don't want to lose, if Facebook runs too high. The Big Lizard gives us no risk to the upside just like Jade Lizard, no risk to the upside, Big Lizard no risk to the upside. We just have the potential of making more money.
Liz: The Big Lizard home run range is non-event.
Jenny: Non-event.
Liz: An absolute non-event where it says it's going to move $5 and it's going to moves nothing. You will keep all of your collection. Let's move talk through exactly how we create the Big Lizard.
Jenny: Big Lizard we sell the at the money straddle and that should give us probably about - You figure if this $5 is 85% of the straddle value then we should be getting about $6 for the at the money straddle. If we sell the 81 call and the 81 - We can do 80 or 81. If you're a little more bearish you can move it down a strike. If you're more bullish you can move up a strike.
Liz: Well, you've got to remember if you're trying to cover what you paid for it, moving it down that strike is going to make it a bit tricky. That's just the caveat the both of us kind of know because of the pricing of the options. If you move it down to the 80s you're going to have a harder time covering what you collected.
Jenny: If you want no risk to the upside. If you want no risk to the upside …
Liz: Go with the calls.
Jenny: You have to move it up a little bit because if we're collecting …
Liz: Go down the money column.
Jenny: $5.84 and we need to buy a call you can see these calls are - If we're doing the 81 and we're collecting $5.84 if we go to this 86 then we will know we can collect more than $5 total and we've got a $5 wide call spread so we know we have no upside risk.
Liz: This is just something I think that comes with time. If we move the straddle price down to the 80s we know we would be paying 93 cents for something and the straddle should be about the same.
Jenny: Mm-hmm (affirmative). If we buy the 86 call we have a $5 wide call spread. Short the 81 call, long the 86, that's a $5 wide call spread collecting more than $5 that's Jade Lizardeskness of the Big Lizard.
Liz: It moves up its expected move, it stays there. No harm no foul. We probably -
Jenny: [crosstalk 00:14:36]
Liz: Small win. You're not going to make the $516. You're going to make something but …
Jenny: I did a Big Lizard in Twitter. It went down. It's near my break even and is $100 winner per one line.
Liz: Yeah. You're going to make something if it goes up.
Jenny: Yeah we're not going to make this $500.
Liz: If it moves its expected move you'll make something. If it moves double its expected move you make 15 cents.
Jenny: We don't lose anything on the upside. On the upside, but on the downside we have risk.
Liz: Right, the downside you do have risk. In this scenario, I just want to walk through all four of them. If it goes up its expected move you’re going to make a little bit of money. No big deal. You want that. If it doubles or triples or anything to the upside you won't lose anything. You'll actually make that 15 cents.
Jenny: This Big Lizard, when we do Big Lizard we're playing for a non-event.
Liz: We're playing for a non-event. To the downside we have one break even. If it moves down, like Jenny said, you may make something depending on how much of a Vol collapse you get. If it moves double you have the risk of that naked put where your breakeven is.
Jenny: Here you can see our breakeven is $75.84. Facebook is trading a little over 80 so it's just a little over $4 so it's within the expected move. That's our break even. That's our risk here and at that level, we would own Facebook - I wouldn't do this trade unless I said, "Okay, you know what, I don't mind owning Facebook at 75."
Liz: It's just under the expected move.
Jenny: Mm-hmm (affirmative).
Liz: If it's trading where it's trading and we know the move is $5.31 it's under the expected move where it is. We're looking for a total non-event. You'll have to go down a little bit no big deal and then it kind expire worthless.
Jenny: We could move this Big Lizard down a strike and that's going to give us an extra $1 in room to the downside but it's going to give us a little bit of risk on the upside. Maybe 15 cents.
Liz: You know what's funny? I do believe this. It's tricky. I think that if things either move their expected move or under and that's what we play for. If it's going to move, that extra $1 to the downside isn't going to do anything. [crosstalk 00:16:24]
Jenny: If Facebook's going to drop, what's that $1 going to matter?
Liz: That's why a lot of people will stress over which strike, what do you mean, what do you do here. It's not going to matter. If Facebook tanks it's going to tank and that $1 wouldn't have done anything either way.
Jenny: Then we own Facebook.
Liz: Yeah.
Jenny: Then we're in Facebook and -
Liz: I know it's easy for us saying don't over think it but it truly is don't over think it. If you're looking at these things you put it on for the assumption. If you've got 15 cents in risk to the upside you're alright.
Jenny: Yeah.
Liz: If you put the other strike it's okay.
Jenny: Yeah.
Liz: There's really no over thinking this.
Jenny: I'm okay owning Facebook if we have to. Then we're in it. Then we're in it. Then welcome to our Wheel of Fortune Facebook and we will start selling calls against it.
Liz: Now what I do think is interesting about this scenario, which I think will throw people for a loop if it does go down and we wind up the wheel is the price that it will be put to us in our P and L. Remember, we're collecting so much here so our breakeven is $75. We're short the 80 put or 81 put.
Jenny: We're selling this for $516. Let's say Facebook drops to $73 and we get put the stack. Come next week it will say we bought 100 shares of Facebook but for every one line. It will say, "We bought 100 shares of Facebook at $80. Now -
Liz: 81
Jenny: $81. We bought 100 shares of Facebook at $81. If it's trading $73 that's going to [crosstalk 00:17:43]
Liz: Holy guacamole!
Jenny: An $800 loser.
Liz: Mm-hmm (affirmative).
Jenny: That will look like an $800 loser but we collected $516 so it's not an $800 loser. It's under a $300 loser.
Liz: Right. I think these things are going to be very tricky for people if that scenario plays out. We're taking in such a large credit that's where we're getting our break even from. Realize, we're selling an in the money put right now. In the money.
Jenny: I just want to show people. If you don't want that risk and you're thinking, "Could this become a butterfly."
Liz: Sure.
Jenny: You could do a broken wing butterfly to -
Liz: You can create an iron butterfly out of this and go $5 down.
Jenny: You can make an iron butterfly. You can make a broken wing butterfly. Say you think, "Oh, I don't mind spending 50 cents on buying a put down here or maybe I'll buy this for 60 cents. Well then your credit received is $4.50. You have about 50 cents in risk on the upside. You have a little more risk on the downside.
Liz: And you've used your credit.
Jenny: Since we don't mind owning Facebook we're just going to put in the -
Liz: We're going to put in the Big Lizard. We have to take a quick break. We're going to open up the phone lines right now. Give us a call 855-238-2789 or 855 be tasty. We're going to come back with Trade Small, Trade Often. After that we'll take callers so stay tuned.