THE WEEK AHEAD: NFLX, IBM EARNINGS; ASHR, GDXJ, XOP, EWZ
EARNINGS:
NFLX and IBM both announce on Tuesday after market close, so look to put on something in the waning hours of Monday's session if you're going to do a volatility contraction play.
Pictured here is a NFLX (42/46) 25/10 iron condor,* with the short option strikes at the 25 delta; the longs at the 10 (as of Friday close). Metrics: $825 max profit; $1675 max loss; 24.6% return at 50% max; break evens wide of the expected move at 311.75/393.25, delta -.74, theta 16.21. Potential volatility contraction from the nearest weekly (April 18th: 78.6%) to the May expiry (44.2%) appears to be in the neighborhood of 40%. The wings can naturally be narrowed to generate a softer buying power effect (e.g., the 310/320/385/395 pays 4.18 ($418) with a max loss/buying power effect of 5.82 ($582), -.45 delta, 6.48 theta and with break evens still wide of the expected).
IBM (67/29): The May 17th 130/135/155/160 is paying 1.50 at the mid with fairly wide markets and pesky strike availability in the May cycle where you'd ordinarily want to pitch your tent. On check on a similarly delta'd setup in the New York session, I'd pass if you can't filled with a fairly delta neutral setup for at least one-third the width of the wings. Potential volatility contraction from the nearest weekly (April 18th: 53.9%) to the following monthly (May 17th: 28.4%) looks to be fairly decent at around 45%.
THE EXCHANGE-TRADED FUND FRONT
Top of the List: ASHR (53/29), GDXJ (33/28), OIH (27/31), XLV (24/14), GDX (21/22), XOP (20/30), and EWZ (18/32).
We're kind of mid-cycle here with May being a tad short (33 days) and June being a tad long (68 days), so would probably wait to put something on until June comes more into view.
Since I don't have anything on in EWZ currently, I might make an exception there. The May 17th 26 delta 38/43 short strangle is paying 1.19, with break evens wide of the expected move at 36.81/44.19, delta -.16, theta 3.6.
BROAD MARKET
With VIX finishing the week at a penny north of 12, we could be in for a long, dry summer of premium selling (who knows, really). A good time to dry powder out and keep it dry for the next uptick in volatility ... .
* -- There is some research in support of the notion that 25/10's more closely emulate short strangle performance over a large number of occurrences; this is naturally intuitive, since you're paying less for the longs, bringing in more credit, and therefore generating more favorable break evens over a tighter winged setup.
NFLX and IBM both announce on Tuesday after market close, so look to put on something in the waning hours of Monday's session if you're going to do a volatility contraction play.
Pictured here is a NFLX (42/46) 25/10 iron condor,* with the short option strikes at the 25 delta; the longs at the 10 (as of Friday close). Metrics: $825 max profit; $1675 max loss; 24.6% return at 50% max; break evens wide of the expected move at 311.75/393.25, delta -.74, theta 16.21. Potential volatility contraction from the nearest weekly (April 18th: 78.6%) to the May expiry (44.2%) appears to be in the neighborhood of 40%. The wings can naturally be narrowed to generate a softer buying power effect (e.g., the 310/320/385/395 pays 4.18 ($418) with a max loss/buying power effect of 5.82 ($582), -.45 delta, 6.48 theta and with break evens still wide of the expected).
IBM (67/29): The May 17th 130/135/155/160 is paying 1.50 at the mid with fairly wide markets and pesky strike availability in the May cycle where you'd ordinarily want to pitch your tent. On check on a similarly delta'd setup in the New York session, I'd pass if you can't filled with a fairly delta neutral setup for at least one-third the width of the wings. Potential volatility contraction from the nearest weekly (April 18th: 53.9%) to the following monthly (May 17th: 28.4%) looks to be fairly decent at around 45%.
THE EXCHANGE-TRADED FUND FRONT
Top of the List: ASHR (53/29), GDXJ (33/28), OIH (27/31), XLV (24/14), GDX (21/22), XOP (20/30), and EWZ (18/32).
We're kind of mid-cycle here with May being a tad short (33 days) and June being a tad long (68 days), so would probably wait to put something on until June comes more into view.
Since I don't have anything on in EWZ currently, I might make an exception there. The May 17th 26 delta 38/43 short strangle is paying 1.19, with break evens wide of the expected move at 36.81/44.19, delta -.16, theta 3.6.
BROAD MARKET
With VIX finishing the week at a penny north of 12, we could be in for a long, dry summer of premium selling (who knows, really). A good time to dry powder out and keep it dry for the next uptick in volatility ... .
* -- There is some research in support of the notion that 25/10's more closely emulate short strangle performance over a large number of occurrences; this is naturally intuitive, since you're paying less for the longs, bringing in more credit, and therefore generating more favorable break evens over a tighter winged setup.
Comment:
Markets are wide in NFLX and some adjustment to the posted setup would be in order if you want in, since it's up about $6 in early trading: The May 17th 305/325/390/410 is bid 6.53/mid 6.81/ask 7.06 just to give you an idea ... . Too wide for my tastes ... . Good liquidity is your friend; bad liquidity isn't.