X -- WHEN A STRANGLE ISN'T JUICY ENOUGH, GO STRADDLE
Needless to say, X has been absolutely hammered this year, and the pain just doesn't seem to stop, if today's earnings are any indication (down 1.49 in AH trading or 11.51%).
With its high IVR/IV (94/102), it's a great premium selling play, but not via short strangle or iron condor due to the price of the underlying; you just won't get squat for premium if you go either of those routes. In this particular case, or, for example, in the case of P (IVR/IV 97/94; current price 12.19), the only way to squeeze any premium out of the situation is via short straddle or iron butterflywhere your short call and short put strikes are the same.
Although I'm going to wait a bit and see what X does post earnings, I will dive in if IVR/IV remain high. Here are some examples of what I'm talking about:
Dec 18th 11/11 short straddle
POP%: 60%
Max Profit: 3.23
BE's: 7.77/14.23
Dec 11th 7.5 (Long Put)/11.5/11.5/15.5 (Long Call) iron butterfly (It's basically an iron condor, only with the short put strike and the short call strike exactly the same)
POP%: 48%
Max Profit: 2.32
BE's: 9.18/13.82
You can immediately see some pros and cons between the two setups (I went with the Dec 11 weekly for the Iron Butterfly setup, because it has .50 wide strikes).
The short straddle has a greater probability of profit than the iron butterfly, greater profit potential, and a wider range to play (break evens are 7.77 and 14.23). (This is not withstanding the difference in expiries; the short straddle would have similar characteristics as compared to the iron butterfly even if the expiries were exactly the same). Moreover, from a purely practical standpoint, "naked" shorts are just easier to manage should you need to roll and save you a little bit in fees and commissions since you're not trading as many legs in the setup.
The drawback to the straddle is that it will require greater buying power, which, depending on your circumstances, you may not want to devote to such a long-term play. You can also naturally ameliorate some of the "narrowness" of the BE's/range of the iron butterfly by widening your long call/puts but, by doing that, you are increasing the buying power required to put on the trade and, ultimately, the risk associated with a potential test of one of the sides of the set-up.
In this particular case, I will be going with the short straddle if IVR and IV remain high in the days following the earnings announcement and will look to take the entire setup off at 25% max profit (about an .81 debit or $81) due to the setup's overall lower probability of profit, which is a function of the narrower range in which price can move for the setup to be profitable as compared to a short strangle.
With its high IVR/IV (94/102), it's a great premium selling play, but not via short strangle or iron condor due to the price of the underlying; you just won't get squat for premium if you go either of those routes. In this particular case, or, for example, in the case of P (IVR/IV 97/94; current price 12.19), the only way to squeeze any premium out of the situation is via short straddle or iron butterflywhere your short call and short put strikes are the same.
Although I'm going to wait a bit and see what X does post earnings, I will dive in if IVR/IV remain high. Here are some examples of what I'm talking about:
Dec 18th 11/11 short straddle
POP%: 60%
Max Profit: 3.23
BE's: 7.77/14.23
Dec 11th 7.5 (Long Put)/11.5/11.5/15.5 (Long Call) iron butterfly (It's basically an iron condor, only with the short put strike and the short call strike exactly the same)
POP%: 48%
Max Profit: 2.32
BE's: 9.18/13.82
You can immediately see some pros and cons between the two setups (I went with the Dec 11 weekly for the Iron Butterfly setup, because it has .50 wide strikes).
The short straddle has a greater probability of profit than the iron butterfly, greater profit potential, and a wider range to play (break evens are 7.77 and 14.23). (This is not withstanding the difference in expiries; the short straddle would have similar characteristics as compared to the iron butterfly even if the expiries were exactly the same). Moreover, from a purely practical standpoint, "naked" shorts are just easier to manage should you need to roll and save you a little bit in fees and commissions since you're not trading as many legs in the setup.
The drawback to the straddle is that it will require greater buying power, which, depending on your circumstances, you may not want to devote to such a long-term play. You can also naturally ameliorate some of the "narrowness" of the BE's/range of the iron butterfly by widening your long call/puts but, by doing that, you are increasing the buying power required to put on the trade and, ultimately, the risk associated with a potential test of one of the sides of the set-up.
In this particular case, I will be going with the short straddle if IVR and IV remain high in the days following the earnings announcement and will look to take the entire setup off at 25% max profit (about an .81 debit or $81) due to the setup's overall lower probability of profit, which is a function of the narrower range in which price can move for the setup to be profitable as compared to a short strangle.
