Oh My Goodness… Part 2 – Requiem for a Tasty Dream

Oh My Goodness… Part 2 – Requiem for a Tasty Dream

Today I decided to follow my heart and not my brain in trading. Net result? An up day but my profits were eroded quickly when I took winners off the table as losers and then decided to get greedy which delayed closing out of winners and a few other winners turning south. TSLA rallied due to the initial buy to cover and then plummeted as I expected to new lows. I grabbed a few puts and rode the volatility train all the way down for about 100% ROI then before closing out the position I decided to add addition positions on, albeit too late, to get some more juice. Bad move… Market turned abruptly upward and the volatility soon faded.

All the while my initial guess on FB was correct but I got a little cautious of the sudden dip and exited my positions for a loss… The same position turned out to a handsome winner in 30mins! Apple spreads I had on were in the green at the starting bell and then Apple took a nose dive. NFLX also went down but I sold out of the put after an abruptly upwind gust.

Point of the matter is there is no way I can focus on 4x level 2 and charts at the SAME time. Managing these stupid positions all at once is not only taxing but costly. The result today was around 30 trades within 1.5 hrs which definitely gave Bob the Trader a run for his money. It’s funny because I used to think it would be so cool to put on a large number of positions and “be like the pros.” In reality, that is the dumbest thing I’ve been doing and need to adjust my mentality to trade SMART not often.

Had I kept my eyes on the prize for TSLA and NFLX while sitting out FB and AAPL today would have been a good day and perhaps a 5 figure day (banking +$10k). Instead, it was a four figure day turned three figures because of excessive failed scalping/trading. A friend of mine told me that his BioTech stocks tanked today which explains why my positions in NQ are further in the red and Mickey and his friends are doing a garage sale over there in Walt Disney land. Yikes… But I digress as I am here to talk about our famed trader Robyn. Before I start on her I have to mention that IF you want to scalp options for directional assumption do it on narrow spread and highly liquid contracts. $SODA would be a bad choice (foolish am I to listen to fools), GMCR doesn’t trade actively either, but TSLA/GOOGL/FB/AAPL/etc are better as they have substantial amount of volume with no issues clearing when you hit the mid.

Here is the latest from her regarding GMCR from our TastyTrade expert:

So she got a $3.30CR for executing this strategy. Let’s examine how. So she sold off the 67 AUG7 puts (for a loss) and sold a SEP18 55C and a SEP25 67P to obtain the $3.30CR. She sold a deep ITM put in a further month in hopes of theta decay combined with non-movement of the stock. In the case of non movement she would collect most of the $3.30CR.

Let’s review here… She got a $2.98CR for closing out her puts and then she sold an inverted strangle for $3.30CR… What was her debit again? -$11DB on those 67 puts. So how did she get out of this one? She sold yet another 67 put for even MORE credit to “cancel” out this bad trade. But is that wise? Let’s examine this strategy for the worst case scenario.

So she got $3.30CR for this “strategy.” If she finishes between 55 and 67 she would stand to lose quite a bit of money… The width of the spread is 12 and she got $3.30 to facilitate this transaction. The put buyer would auto exercise leaving her with buying GMCR at 67 and then the call buyer takes delivery of the stock at 55 with an instant $12 loss per contact x 100. Her net loss would be $8.70/contract provided that she got the $3.30CR. This is if she holds til expiration without further adjustments. What about it ending OTM on either sides?

Well, the “best” case scenario is being between the width of the strikes because at 54, while the call is expiring worthless, she would have to take delivery of the stock at 67 which yields a $13 loss per contract vs $12.

So how can she win and why did she do this? Well, like I said before, she is screwed big time on this strategy and without admitting defeat and taking the loss she is trying to slowly buy more time as the executioner is finding more time to sharpen the axe. Whether her head rolls today or in a month or so is irrelevant. She is banking on the stock moving up so that the credit received will negate the price action and volatility compression in hopes of mitigating a huge losing position. Any further movement down south would spell her doom and she would be back to beginner status below Alex W and Jacob Wohl. No beuno, as Tony from Mexico would say.

This is how earnings are as binary events and why playing earnings has huge risks. You might end up delivering a huge amount of stock you don’t want to buy OR taking delivery of huge amount of stock you don’t want to own all for a thesis on statistics as presented by Market Measures? Please…

What I’ve found as a more effective way of playing earnings is POST earnings strategies where the market has already priced in the movement within 5mins of the opening bell. All the volatility is already gone and now it is more about level 2 reading and seeing if there is additional panic. This is MORE predictable than attempting to flip the coin and guess what happens the day before. Why? Because the initial reaction to some stupid news for a day or two is ALWAYS overstated in majority of the big stocks. Look at NFLX, DIS, GOOGL, FB, AAPL, etc if you need some proof of this. DIS is on it’s second sell off day and AAPL is on it’s 7th straight day of being under $120. This stock has been above $120 for months and now the market feels it is worth $114 but a while ago it was valued at $132. The current P/E on AAPL is 13.3, TSLA and AMZN doesn’t even have earnings (no love, no profits), GOOGL is at 33.69, and NFLX is trading at 284.3 times it’s earnings. Which stock is discounted? Hmm, I wonder… DDD was at one point trading 200 times it’s earnings as well in the 20/30s after falling from almost 100 at the end of 2013. Surprisingly, DDD jumped 21% after missing earnings. Short squeeze?

What’s on the radar for tomorrow? It’s going to be news from the Government that people will price in regarding the interest rate once again. Stay strong as it is very rough out there and remember that CASH is always a position. When there is no clear indication of movement, direction, etc, play a neutral strategy (calendar/diagonal). Jump on the train and watch the T&S very closely for a good exit or use the IV_rank of course because below 50 means sell and above 50 means buy… Did I get that backwards? 🙂 I think our TastyTrader might have as mentioned above.

Don’t trade earnings! It isn’t worth the risk. I say this with personal experience as I have a significant portion of my account resting on failed earnings plays I am looking to liquidate.

Maybe she should DOR… “I’ve got no where else to go…” A moment of silence for our TastyTrader.

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Oh My Goodness… Part 2 – Requiem for a Tasty Dream

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