THE WEEK AHEAD: M, BBY, OIH, VIX
EARNINGS ANNOUNCEMENT/VOL CONTRACTION PLAYS:
M announces earnings on 2/27 before market open. Preliminarily, the March 24/30 short strangle is paying .84 at the mid, which isn't very juicy. Given the size of the underlying, it may be more amenable to a short straddle or iron fly, with the March 9th 27 short straddle paying 2.95 and the 23/27/27/31 iron fly paying 2.13 with the longs camped out around the 16 delta strikes. I would shoot for 25% max profit or .74 in the case of the short straddle; .54 for the fly.
BBY announces on the 1st of March before market open. The March 9th 20-delta 66.5/81 short strangle is paying 2.05 at the mid, with the defined risk variant 63.5/66.5/81/84 iron condor paying just a smidge short of one-third the width of the wings -- .92/contract.
HIGH IMPLIED VOLATILITY EXCHANGE-TRADED FUNDS:
The exchange-traded funds screened for percentile greater than 70% and ranked by percentile are IYR (background 20%); XLI (background 20%); FXI (background 26%); EEM (background 22%); and XLU (background 18%). Ranked by background implied: GDXJ (33%; 33rd percentile); XOP (32%; 64th percentile); OIH (32%; 80th percentile); GDX (28%; 42nd percentile); and EWZ (28%; 19th percentile). Generally speaking, I like to pull the trigger on a premium selling trade when the percentile is greater than 70% and the background implied is greater than 35%, so I would pull the trigger on an OIH setup here, even though it's slightly short of that 35% background metric.
Here are a couple of possible plays:
Neutral Assumption/Undefined:
OIH April 20th 25 short straddle
Probability of Profit: 54%
Max Profit: 224/contract
Max Loss: Undefined
Break Evens: 22.76/27.24
Notes: Look to take profit at 25% max or .25 x 2.24 or .56/contract. Intratrade defenses: roll of untested side toward current price, delta hedging.
Neutral Assumption/Defined:
OIH April 20th 22/25/25/28 iron fly
Probability of Profit: 44%
Max Profit: 176/contract
Max Loss: 122/contract
Break Evens: 23.22/26.78
Notes: As with the short straddle, look to take profit at 25% max or .25 x 1.76 or .44/contract. Intratrade defenses: Delta hedging.
THE VIX
After this recent pop, I'm still watching the VIX and VIX futures term structure to return to its ordinary "contango look." While the structure has returned to contango if you look at the March, April, and May expiries, May is in backwardation relative to June, June in contango relative to July, July in backwardation relative to August, with the remainder of the structure in contango.
M announces earnings on 2/27 before market open. Preliminarily, the March 24/30 short strangle is paying .84 at the mid, which isn't very juicy. Given the size of the underlying, it may be more amenable to a short straddle or iron fly, with the March 9th 27 short straddle paying 2.95 and the 23/27/27/31 iron fly paying 2.13 with the longs camped out around the 16 delta strikes. I would shoot for 25% max profit or .74 in the case of the short straddle; .54 for the fly.
BBY announces on the 1st of March before market open. The March 9th 20-delta 66.5/81 short strangle is paying 2.05 at the mid, with the defined risk variant 63.5/66.5/81/84 iron condor paying just a smidge short of one-third the width of the wings -- .92/contract.
HIGH IMPLIED VOLATILITY EXCHANGE-TRADED FUNDS:
The exchange-traded funds screened for percentile greater than 70% and ranked by percentile are IYR (background 20%); XLI (background 20%); FXI (background 26%); EEM (background 22%); and XLU (background 18%). Ranked by background implied: GDXJ (33%; 33rd percentile); XOP (32%; 64th percentile); OIH (32%; 80th percentile); GDX (28%; 42nd percentile); and EWZ (28%; 19th percentile). Generally speaking, I like to pull the trigger on a premium selling trade when the percentile is greater than 70% and the background implied is greater than 35%, so I would pull the trigger on an OIH setup here, even though it's slightly short of that 35% background metric.
Here are a couple of possible plays:
Neutral Assumption/Undefined:
OIH April 20th 25 short straddle
Probability of Profit: 54%
Max Profit: 224/contract
Max Loss: Undefined
Break Evens: 22.76/27.24
Notes: Look to take profit at 25% max or .25 x 2.24 or .56/contract. Intratrade defenses: roll of untested side toward current price, delta hedging.
Neutral Assumption/Defined:
OIH April 20th 22/25/25/28 iron fly
Probability of Profit: 44%
Max Profit: 176/contract
Max Loss: 122/contract
Break Evens: 23.22/26.78
Notes: As with the short straddle, look to take profit at 25% max or .25 x 1.76 or .44/contract. Intratrade defenses: Delta hedging.
THE VIX
After this recent pop, I'm still watching the VIX and VIX futures term structure to return to its ordinary "contango look." While the structure has returned to contango if you look at the March, April, and May expiries, May is in backwardation relative to June, June in contango relative to July, July in backwardation relative to August, with the remainder of the structure in contango.
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