The following is a trade we undertook ahead of AA’s earnings on the 11th July 2016. It is a Strangle and was entered on July 11th. AA were scheduled to release earnings after the market on the 11th.
ENTERING TRADES AHEAD OF EARNINGS IS RISKY!
A strangle is an options strategy in which you take a position on both the call and the put side of the stock with the same expiration BUT with different strike prices. This trade is useful as an earnings trade because you can never predict which way the stock is going to move. The profit comes from the premise that the stock will have a significant move in either direction. It is not the direction that matters but the size of the move, it is a good strategy if you think there will be a large movement in price.
|Buy AA 22JUL16 10C -.41||Sell AA 22JUL16 10C +.81|
|Buy AA 22JUL 9.5P -.18||Sell AA 22 JUL16 9.5P +.01|
|TOTAL cost -.59||TOTAL return +.82|
|Cost of trade .59 = Maximum Risk||Return = .82 – .59 = +.23|
|.23/.59 = 38.98 = 39%|
|Return on Capital Employed = 39%|