T stock has earnings July 25 after the bell and the current implied volatility is inflated. Can current stock owners profit from selling premium before earnings?
What if the investor is willing to acquire more shares if the stock falls to the put strike and willing to sell shares held if the stock price rises to the call strike?
Last price of of 36.52
Implied Volatility is 20.9
28 Days to Aug 18 Expiry
1 Standard Deviation range 34.4 - 38.64 which implies an expected range of +/- 5.79% by expiry.
The current stock price is right in between the straddle strikes so you'd need to choose depending on if you're bullish or bearish on the stock currently.
The 37 straddle credit is $1.57 or 4.3% of last price for break even at 35.43 and 38.57.
The 36 straddle credit is $1.63 or 4.46% of last price for break even at 34.37 and 37.63.
An advantage to selling the straddle is right now the $37 strike volume is higher and more liquid.
A disadvantage to selling the straddle is the narrower breakevens and lower probability that the stock price is between the breakevens by expiry (about 50%).
The straddle can however be managed early at 25% of the initial credit for a higher probability of success.
The 34-39 strangle (about 12 delta) gives a credit of 25c (a paltry 0.68% of last price) for breakevens of 33.75 and 39.25. This is outside the range of the expected move.
The 35-38 strangle (about 22 delta) gives a credit of 53c (1.45% on the a T price of 36.52) for breakevens of 34.75 and 38.53. This is just inside the range of the expected move.
The 20 delta strangle credit would yield an annual rate of 12%+ if sold 8 times a year.
An advantage to selling the strangle is the wider breakevens and higher probability of success that the stock price is between strikes by expiry and the investor keeps the whole credit.
More info on the covered straddle strategy:
https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/covered-straddle
What if the investor is willing to acquire more shares if the stock falls to the put strike and willing to sell shares held if the stock price rises to the call strike?
Last price of of 36.52
Implied Volatility is 20.9
28 Days to Aug 18 Expiry
1 Standard Deviation range 34.4 - 38.64 which implies an expected range of +/- 5.79% by expiry.
The current stock price is right in between the straddle strikes so you'd need to choose depending on if you're bullish or bearish on the stock currently.
The 37 straddle credit is $1.57 or 4.3% of last price for break even at 35.43 and 38.57.
The 36 straddle credit is $1.63 or 4.46% of last price for break even at 34.37 and 37.63.
An advantage to selling the straddle is right now the $37 strike volume is higher and more liquid.
A disadvantage to selling the straddle is the narrower breakevens and lower probability that the stock price is between the breakevens by expiry (about 50%).
The straddle can however be managed early at 25% of the initial credit for a higher probability of success.
The 34-39 strangle (about 12 delta) gives a credit of 25c (a paltry 0.68% of last price) for breakevens of 33.75 and 39.25. This is outside the range of the expected move.
The 35-38 strangle (about 22 delta) gives a credit of 53c (1.45% on the a T price of 36.52) for breakevens of 34.75 and 38.53. This is just inside the range of the expected move.
The 20 delta strangle credit would yield an annual rate of 12%+ if sold 8 times a year.
An advantage to selling the strangle is the wider breakevens and higher probability of success that the stock price is between strikes by expiry and the investor keeps the whole credit.
More info on the covered straddle strategy:
https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/covered-straddle
Trade active:
The day of earnings, just before the close the price of T was 36.50, so I sold the Aug 18 36/37 strangle for $95.
On an earnings beat the stock unexpectedly jumped over 8% moving above the breakeven. I closed the 36 put for $4 (no fee) in case the suddenly pulls back, but perhaps should have just left it to expire worthless?
The question next is how to manage the call as the stock is still above the 37 call strike. Possibilities:
1) the markets sell off (DJIA hit ATH @ 22,000 today) and T revisits the 36 range.
2) I roll up and out to Sep expiry
3) I close the straddle for scratch before expiry and keep the stock.
On a side note, holding 1 lot of T stock added almost $50 dividend to the account this week.
On an earnings beat the stock unexpectedly jumped over 8% moving above the breakeven. I closed the 36 put for $4 (no fee) in case the suddenly pulls back, but perhaps should have just left it to expire worthless?
The question next is how to manage the call as the stock is still above the 37 call strike. Possibilities:
1) the markets sell off (DJIA hit ATH @ 22,000 today) and T revisits the 36 range.
2) I roll up and out to Sep expiry
3) I close the straddle for scratch before expiry and keep the stock.
On a side note, holding 1 lot of T stock added almost $50 dividend to the account this week.
Trade active:
Surprised my stock hadn't been called away already by now!
Rolled the Aug 18 37 call to the Nov 38 call for "free & fee"
Gives me more upside profit potential on the stock.
If the stock drops over the next month, I can buy back the call to close it early.
Rolled the Aug 18 37 call to the Nov 38 call for "free & fee"
Gives me more upside profit potential on the stock.
If the stock drops over the next month, I can buy back the call to close it early.