Earnings Example: Short Call & Short Put on NFLX | Cameron May | 10-11-19 | Options Week in Review

Earnings Example: Short Call & Short Put on NFLX | Cameron May | 10-11-19 | Options Week in Review

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Good. Afternoon, welcome, everyone my name is Cameron May it, is 3:30 Eastern Standard Time on a Friday afternoon there's, 30 minutes left in the trip and. To take. A pee ready, about six, dozen. Attendees. And climbing, hello, Gerald Robert Brian Pete Tyga Jim, Mike, Elizabeth. Sherry, Dale Rosario, and Davy, and. Welcome to all the rest of you who come back week after week I appreciate, your attendance and your contributions. If you're here for the very first time I want to welcome you and. If. You're listening in on the YouTube archive after the fact enjoy. The presentation, but you're also invited to join us live, 3:30, Eastern on Fridays, if you want to put that in your personal calendar and for, everyone, you have my invitation, to follow me on twitter, my handle is, at CMA, underscore. TDA and I try to tweet something every day of the week and it might be a market observation. Like a personal, information, just great, to make, that connection on that platform all. Right but let's set let's do this let's pause to consider the risks associated our investing, then we'll set an agenda for the day and we'll get right to what's happening in the markets. Options. Are not suitable for all investors spread. Straddles and other multi league strategies, can, entail substantial, transaction, costs, any investment, decision you make in your self-directed account is solely your responsibility. Transaction. Costs commissions. And other fees are important, factors and should be considered when evaluating any trade that. $0 Commission applies to online US Exchange listed stocks ETFs and, option trades, Lords, free Commission. $0.65. Per options, contract, fee applies to options, trades all, investing. Involves risks including risks of loss and we are going to be using real examples, in today's discussion it's not a recommendation or endorsement of those securities are those strategies and here's a quick overview of your, Greeks all. Right so let's go straight. To it. Let's. Have a look at our agenda for, the day three items on the agenda as there as there are every, Friday when. I'm instructing, the options, we can review first, we're going take a look at what's happened with the stock market and the options market since we last convened, then, we're gonna see what economic.

News Headlines, and earnings announcements, might be driving that activity, or at least contributing, to it and finally. We'll take a look at the weekend had economic. Announcements, earnings and those sorts of things what I want you to walk away with, after we've gone through these three agenda. Items is how, my how you might gain your own context. Through, the tools and resources they're. Available to us on thinkorswim and on. TD, Ameritrade comm all right so. Let's, see what's happened in the stock market popping. Over here the S&P, 500. Been. A bit of a bumpy, ride over the course of the last several months but this week. Primarily. Upward, now. Some technicians may have noted that, it looks like we're just bounding off of a recent. Trend, line if, you'll notice this is we're coming into the first part of this week, we. Came right down touched, on Tuesday's. Lows and then, rebounded, higher so technically. Speaking. We. May a. Trader might be able to make a case for bullishness. On the markets and overall since Christmas that seems to be the prevailing sentiment. All. Christophe, you say it's now, Iranian, Florida well the the, bright, sunny. Days finally reached Utah we, went from right, near 82 not, breaking, 40, in, just. Two days yes. We have beautiful weather and in freezing. Weather yesterday, but we're back on the upswing I. Still. Envy, you in the end the warmer states sometimes, but. That's what's been happening with the S&P 500. And and that the question now becomes. What's. Due what's causing that activity, and how. Have the options, markets, responded, well we're gonna pause on that first part of the question let's. Address the second, scenario what's been happening with options, pricing. Well. As we swing over here to the volatility, index, for the S&P 500, some. Options traders use this as a gauge for what's happening for the pricing, of options overall, our price, is generally rising or falling and, that's, for calls and puts now. It's not gonna be a universal. Truth this doesn't apply to every, single stock every single strike. On every stock but. Generally speaking this. Might give us a gauge for the pricing, of options overall, and you can see recently the. S&P 500 in volatility. Index hit, a peak. As the markets were hitting their short their near-term, trough and. As the markets have been rising, volatilities. Have been dropping. Now. What that translates, to for an options, traders it means that premiums, have been coming down. Generally. Speaking, alright. Hello there Mary good to see you. So. Now the question becomes are they continued, are they likely to continue, going down is there room for, volatilities. To drop further what do you think about that you. Veterans, who look at this on a regular basis. Do. You see a little bit more downside, to, the volatility in other words can options, prices, be a little, more suppressed. Let's. Make the case that maybe they, do.

Head In that direction okay. So, what. Does that mean for a trader well maybe this makes it more of a seller's market than, the buyers market as. Prices, fall generally, that means, it's. Better that you just recently sold then it then if you just recently bought something including options. So. That's what's happening with the stock market and with the options market but, what seems to be driving this what's been the news what. Are some of the things if you want to chat in let, me know some of the headlines, that you've seen that seem to be contributing to. Market. Direction, and two options, behavior, over the course the last five days, because. I'll tell you what what, I've noticed and and you, may agree with this you may have noticed something else but. There. Is a, meeting. Of the minds going on between the US and China right, now regarding. Trade and it. Looks like at least initially there may be progress, in that direction, all, right there was some. Hopeful tweeting, going, on and then. There was some. Some. Preliminary. News. Leaking. Out of that out. Of that. That. Negotiation. That, it looks like maybe an agreement has been reached we'll, see what that what, that precisely, entails, obviously. There. Are still some types of steps to be taken from here but I think, one. Of the things that traders may have their eye on is apparent, progress, on the trade front and that. Has been a topic that's been grabbing a lot of headlines raised so. Where would you go to know this sort of thing if you if, you haven't been following this well you can pop up the, news and hope that the right thing, happens. To to, hit your screen or you, can, head over to the TD Ameritrade website, and we're. Just gonna come right up here to research in ideas and check the news so. If I click right on news the, very first thing that we're currently confronted, with and what we check on on a regular basis, is this. Market, snapshot, and notice the headline says Dow advances, more, than 400, points after report. Of us-china, trade truce. So. If we weren't up to speed before this. Might, help. Us make rapid, progress at, least in that direction and, if we click on that it'll give us more. Detail about this development and about others throughout the week, what. Else is going on. Did. You notice that that. The Fed, just. Announced that it intends to buy sixty billion dollars that's billion with a B in, T. Bills each month through. In, or at least into, the second quarter of 2020, so, they're building up their reserves of T bills and so. The market may be interpreting, that as some, potential, bullishness it may contribute, to to. Access, to funds and in, the US economy and could, could theoretically contribute, to higher stock prices obviously that is, a tale yet to be told. But. Yeah there is some bullishness, in the news, on. The news front but what about. Economically. What. Have been some of the major developments this, week economically. Let's check our calendar I'm going to go up here to research and ideas, again.

We're Gonna go down under the markets heading to the calendar, and we're. Gonna turn our gaze. Direct. Our attention to, the economic events, right here and this. Calendar, allows us to take a quick look back over. The, last five days and. Over the last five days a few. Highlight, items now obviously. Whether something's a highlight, or not depends, on whether a particular company. Has particular, exposure to. That sort of an announcement but, on Tuesday. We. Had the PPI, numbers, that producer, price index. Now. Do you think the Fed in. Their. In. Their. Role of administering, to interest. Rates might, be paying attention to what's happening with producer, prices and consumer prices I think. That makes sense right they have a stated, objective to, have a, rate, of inflation around, 2%. Now. On the, consumer, side of things and on the producer side of things we see a little bit softer, numbers than that this, week. All. Right so. Our our, PPI, numbers, came. In, down. From, the last report, last. Time point, 1% there, was a consensus, expectation. Of just prices, holding steady, we actually slid, down. 0.4%, to, a net minus, point three percent. So. Producer, prices slipping. A little bit and we saw that reflected, in the year-on-year numbers. As well where we were previously at 1.8 percent now down to 1.4 percent, so, some softening, of producer, prices and that. May be a hint of the. May. It may raise the feds concern obviously I'm not a Fed chair member so, I can't speak for them directly and they're, gonna do what they want to do but maybe that that. Might incline, future. Rate. Increases, pardon. Me decreases, rate cuts in, an effort to stimulate growth, in. The. Economy and in prices again. Only the Fed knows what the Fed is gonna do although. There were there was some language on Wednesday, from, the FOMC. But. Let's have a look at consumer. Prices what happened there well on Thursday, consumer. Prices were reported, those came in right. On target. Basically. There. Was a consensus, expectation, of 0.1 percent we actually came in a little bit softer, a little, bit under that that's.

Down From a prior actual, 0.1, percent, growth - CPI, so. Consumer. Prices. Soft, dish producer. Price is softer. Again. Maybe the, Fed takes that into their, algorithm. Of how they make their decisions, and but that might be an argument for rate. Cuts which. Many. Market observers see is being potentially positive for. Markets so. Could. These numbers. Contribute, to the. Increases. That we've been seeing since Tuesday morning on the S&P, very. Well could be yeah, so sherry says what does PPI stand for so it's sherry, so it's the producer, price index and. The. Consumer, price index okay. So. Producers you might think of that as being the wholesale. Cost, of things and then. Consumer. As sort of the retail cost of things. It's. Not a perfect, analogy but, it's close enough and then. On, Thursday. We also had, that, jobless, claims report. That came in and, that. Was actually a little bit more bullish, than anticipated. Last. Time 222, thousand, new claims, for unemployment, there. Was an expectation of, about two hundred eighteen thousand, so maybe a slight improvement but. We actually came in at two hundred ten thousand. So, we have fewer claims, than. We saw last week which, indicates maybe joblessness, might. Be declining, a bit, now. That. May have contributed to consumer. Sentiment numbers which we saw today well. But another thing that that was included in this report was that layoffs, numbers, are still, holding, right. Down near historic, lows. So. That's. Interesting but. Generally. Speaking, maybe. Some positive news from the economic, front at. Least as far as, market. Investors, are concerned. On. Friday as I mentioned we had our consumer. Sentiment number that just came out and it, came in at, there. Was a bit of a positive surprise there consumer sentiment was expected, to slip last, time it was at ninety three point eight an. Expectation is slipped down to 92 it actually checked in at 96, so instead of going down consumer, sentiment. Improved. So. Number. Of things that might be, potentially. Explaining, why the S&P has been climbing but maybe, the primary thing being, advances. In on, the trade front who, knows we'll, see what's. Coming up next week well. There are a few things on the on the immediate horizon for, next week we have on Wednesday, retail. Sales, on. Thursday. What, did we have oh housing, yeah, Thursday we have our housing. Starts how many new. Foundations. Are being dug right right, now and, then. On Friday we have. Oh no, again on Thursday we have the jobless claims report, we'll check up on again check, up on that again next week so, that's what's happening on a macro, scale what's.

Happening On the micro scale what's happening with, specific. Companies, where, do we check on earnings we can do that right here on this same calendar. And. We're gonna switch over to looking, at individual. Publicly, traded companies, now. This last week as far as earnings, is concerned, just. About as quiet as it gets. Typically. We'll follow the, number of earnings, beats, versus. The number of earnings misses, and you, can do that just clicking on the dais and scrolling. Back through really, you can see very small numbers, right now and for, the entire week we saw five, beats one, miss that is that's the product of a very quiet. Earnings, week. There. Were still some companies, that had earnings that. Were announced oh we had Delta Airlines, when was that Delta. Was on I've got to check my notes. Here. Yeah. Delta. Was on Thursday. Fastenal. Was. On Friday. Delta. Beat. Expectations. Right. Down here. 232, versus, 226. Consists, a consensus, expectation. Fastenal. I want. You to notice something as we, look at Fastenal. Deliver. 37. Cents in, profits. Or earnings versus. 35, and a half cent, expectations. So that, might seem like a comparatively, modest, beat. However. That paired up with better, than expected, sales numbers, as well so we, revenues up profits, are up what does that do for the company and they they gave, encouraging. Guidelines, for the coming quarter. And year. Well. If you look at the charts. Here. With shareholder, reaction, to Delta. There's. Their earnings announcement, and. You, know a modest. Move, up in price following, a bit of a sell-off. So. Not much happening, in Delta moving around in a dollar a dollar and a half range with, Fastenal, though a. Strong. Move up, okay. So. That can happen with earnings announcements, we're familiar with how far stocks, can move so, here's a question for, you is there. Ever a hint, within the, way that options, traders, behave. Regarding. Their demand, their relative, demand for options, that, may it.

May Provide a clue regarding, which, stocks at least options, traders are, expecting, to have the biggest moves on earnings announcements. How. Might we gauge. That now we never, a guarantee in advance of earnings what's actually gonna happen on the earnings but, it's an interesting question. Stephen. Says how did I get to this chart so Steven this is a chart that's on our thinkorswim, trading. Software if you're, not familiar with sinker thinkorswim you'll, see pretty, much all of our instructors. Using, it again. It's for trading it's. Available for free for. Anybody with a TD Ameritrade account and the, way that you would get that is right here on the platform, just. Pop up to the trade tab. Right. Up here and, download. Thinkorswim, right, through right, through this link, right here. Okay. Alright, so you're all ready okay. So we're, getting some some. Suggestions. For how a trader may measure, in advance, how. Much of a move other. Options. Traders are expecting, on a stock, from. An earnings announcement. Christophe. Saying hi implied volatility, that's one way. Shikaka, saying. Standard. Deviation it's a mathematical. Term from, measuring historical. Movements. Well. I'm going to show you something. We've used it a few times in my discussions, but, we have a bunch, of companies, we're, actually moving right into earnings season next week it's. Gonna start with the banks the big banks are announcing. On Tuesday. And Wednesday, but. We can see that right here on our calendar, if, we look at let's say that Tuesday of next, week, there's, JP Morgan, there as well as Fargo there's goldman sachs, Blackrock. On. Wednesday. We have Bank, of America. But. They're being joined by some other big big companies right Abbott. Labs Netflix. IBM. US, bank PNC, Financial and. Moving. Into Thursday. Taiwan. Semiconductor Philip. Morris Honeywell, Union, Pacific, Morgan Stanley Intuitive Surgical you. See yeah. We've put the quiet days behind us and a lot of earnings coming out well, here's what I did I, went. And looked at this tool. That's available on, thinkorswim. To. See where. Do the options traders see the most, potential. For, movement now it's not telling me whether they expect bullishness or bearishness just. Movement or volatility. And. Here's. Where we might see this I'm gonna pop back over here to thinkorswim I'm.

Gonna Go up to trade to the trade tab and I'm gonna use 1. Stock. To illustrate. This tool then, I'm gonna show you once, we understand what it means another. Stock that's gonna be markedly, different all, right so, coca-cola, is, announcing. Next week so. I'm gonna look at these contracts. That expire next weekend, and. I'm. Gonna peek over, here at this number now a lot of you probably notice this number the, one that's in parentheses here, you, see a plus/minus and. You may be wondering, to yourself. What. Does this mean well, this literally, is, taking, the, demand. For options, on that stock. At that. Expiration, and, as. Demand goes up what does that tell you about what. Options traders, are expecting, from that from, that stock during that timeframe, well. If can if, if traders, are demanding. A heavy. Number of 7-day contracts. They. Must be expecting something to happen within those seven days because the speculators, are. Expecting, big movements so they can maybe make money hedgers. Might. Be expecting, big movement that they need to hedge against, but anyways that. Increase, in demand can. Be a bit of a tell regarding, how much volatility, is expected so the Christoph, your comment about implied volatility, exactly. This number right here is implied volatility, off to, the right though this. Plus/minus, is known as our market, maker move. Basically. Roughly, translated, it means that, by. The. 18th of October, options. Traders in the way they're behaving, are. Roughly. Expecting, a move potentially. Up or down of a dollar eighty one on coca-cola. Now that includes, earnings. Next week. Notice. As. You move into if, you give it another whole week well, they're only expecting a range of about two dollars and ten cents so it's really only an extra, 30 cents up or down so the real activity is in, this next week. Well. If we look at the current price of the stock a dollar, eighty one on a. Fifty, three dollar stock is only like three, and a half percent up or down, so. Is this expecting, our, traders expecting a big move on. During, this earnings week yeah. Three and a half percent up, or, down, let's. Compare, that though, to, Netflix, Netflix. Is, announcing I believe next Wednesday. And look. At that seven-day, contract. Plus. Or minus about thirty bucks. This. Is on about a $300, stock so roughly, speaking. Traders. Of Netflix. Options, are, expecting. Somewhere, in the range of $30, up or $30 down or 10%, up 10%, down that's three times, the. Volatility. That that that, seems to be anticipated. In Coke. And Netflix. I looked at about 8 or 10 stocks, that are announcing next week most of them were in the 3 to 5 percent up or down rain, Netflix. 10%. Up or down so. What. Might this mean for an options trader well for a speculator, maybe they buy an option and hope that that, big, move happens, in their direction or. Maybe. They sell now in this discussion. What I've noticed in the chats in previous weeks is people will talk about, selling. A strangle. In. Advance of earnings on stocks. Where there's, a a big anticipated. Move let. Me show you what can happen on, a stock that gets this, high, implied, volatility. I'm. Gonna open up those contracts, for, just the 18th of October so remember, these are only good for seven for seven days and yet. You'll, still see trading, happening. Way. Way. Away from the current price. $220. Is, $65. Below where the stock is right now and yet there, are still there, still acquitted, E there. Too. Let's let's let's, move to the call side if, we, go like 65. Bucks above, the current price that, would put us all the way up at like, $350. Well. Even at $350. We're still getting active. Quotes, they're. Still trading happening, at those. Really. Distant. Strikes. Now. What this might do is it, might provide an opportunity for somebody who wants to sell options there still could be some premium, to be collected, even, just for shut such a short period and even, so. Far, out of the money, so. I'm gonna do this this is what I'm gonna do I'm, gonna sell. Let's. Say that we go I don't, know how far we want to go out of here but. If the if the if, traders are expecting a $30, move up or down, well. What if we sold, something, that was like $45. Out, of the money that would put us at about the, $330. Range for. A call that's. Training for about two dollars and thirty-five cents between 230, and 240 ish, okay. If. I sell that call and if the stock doesn't go, above. 330 at expiration. Then. We just get to keep that premium on the, flip side of that it.

We Moved let's say $45. Out, of the money on the puts. That. Would put us down around 240, dollars. We. Might be able to collect another dollar $50. 55, on, a 240, put, all. Right let, me help you visualize that and we're just gonna do it, 240. And what was our other strike. 330. Yeah. Right. There, let. Me show you that on a chart. Let's. Bring up Netflix. 240. Is down, here. 330. Is all the way up here so as long as the stock remains, between. Those, two strikes this trade is maximized. This is known as a naked strangle, I will say, if. You're just exploring, options very first time this is one. Of the riskiest. Strategies, because, it has no defined, risk it has unlimited, risk now. There are ways that this risk could be met and managed or mitigated, like, buying even, further out of the money options, on both sides that would create what we call an iron Condor but. Since this has come up in discussion, I just wanted to do that just. Doesn't as an illustration and we'll just see how it goes in in, the coming weeks so I'm going to click on the bid price for. The 330 call to, create the one side of the trade and then. I'm going to go back up. To. The option chain and click. On the bid price for, that 240, put while. Holding down my control key and that creates. A sell order for the put and that creates, our strangle. Now. I think for example, purposes, we're only going to do one contract, here but. This is known as a naked strangle, it's, generating, a 380 one credit, about, a about, one and a half percent that, could potentially be made on a three hundred two, hundred eighty dollar stock in seven. Days okay. We're gonna submit this as a limit, order but let's just maybe dial down the credit. Required. Hopefully. To increase the likelihood of a quick fill and, I'm gonna click confirm and send because we only have a couple of minutes left before the markets closed. Selling. That strangle, look. At that max loss. Infinite is this a strategy, you wouldn't want to examine, a little, bit more deeply than in five minutes on a Friday afternoon yep. There. Are our transaction. Fees send. That order off and we're, in so. This will be interesting to follow through, on next, week but we've accomplished, everything that we wanted to check on.

In. Our agenda we've, now discovered how, we can check the news how we can check the calendar for economic. Developments, we've, looked at what's happening on the stock market in the options market to determine. Recent. Developments, and what may explain. Those and we now know how to go check on, what's. Going to happen with earnings and economic news next, week all right this is this will be interesting let's follow up on this next week everybody. Thanks. For joining me today I'm going to set you loose but, please do follow me on Twitter at CMA. Underscore. TDA if you are brand new to options, you need to brush. Up on the concepts, check. Out barb Armstrong's, archives, or a live webcast, getting. Started with options, that's on, Fridays. At, 11:00, o'clock Eastern, Standard Time if you do want to attend live, but. Time. To get out there and get, some practice if this is your first time with something like a strangle. Learn. About it first, learn learn learn practice. Practice practice you, can go to your paper money place, a couple of practice trades if you like just be aware of the significant, risk of the strategy. Everybody. Thanks for joining me today, quick, reminder of the risks associated, with investing, risks are real we did use real examples, in today's, discussion is not a recommendation or endorsement, of those securities, or those strategies, will. Circle back again next week see. What's happened in the markets and see. What's around. The corner for, the week after that, I'm. Looking forward, to it you can join me in my other regularly scheduled, sessions between now and then but. Hey whenever I see you again until that moment arrives I want to wish you the very best of luck happy. Investing bye bye.

2019-10-14 23:39

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