Micron 59% Winner, Cattle 82% Winner | Trades of the Day

Texas Instruments

The speaker executed a calendar spread by selling the 4-day cycle option at 320 strike and buying the 11-day cycle option at 320 strike. This trade capitalizes on the difference in implied volatility between the two cycles, with the 4-day cycle having higher implied volatility. The trade was filled at a $2 debit, reducing the cost basis significantly. The expected move is up to 320 or down to 260, and the trade benefits from the implied volatility crush in the 4-day cycle. The speaker notes that the 11-day cycle's implied volatility is expected to drop to 60%, while the 4-day cycle's implied volatility is expected to drop to 60% as well, creating a 25% and 60% volatility crush respectively.

Micron

The market is on its backside, and the high is at 1255. The strategy involves selling out of the money calls to add short delta, potentially turning the position into an iron condor. The goal is to capture a pop to the upside while managing risk through the iron condor structure.

Micron

The speaker proposes a vertical put spread strategy on Micron, selling the 795s and buying the 790s, which provides a defined risk with a maximum loss of $320 and a potential profit of $180. The trade is based on the assumption that the price will stay above the previous swing low, allowing for a brief pop on the downtrend. The strategy is designed to manage risk effectively and allows for adjustments if the trade direction is incorrect.

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The speaker considers selling a put spread as a way to capitalize on the current bearish sentiment and downside skew. The trade involves selling a put at a strike price of 235 and buying a put at a higher strike price, limiting the risk while capturing potential profits from a downward move. The speaker acknowledges the risk of continued price declines and the uncertainty of the commodity's future performance, but the trade is seen as a lower-risk alternative to selling a straight put. The trade is structured to have a limited risk and a defined profit potential, with the speaker noting that the maximum profit is $130 and the maximum risk is $145.

N/A

The speaker suggests selling a put at $670 with a max profit of $130, and potentially adjusting the strike to a 25 delta for a wider range. The trade is based on the idea that the market is at an inflection point, and the next breakdown could occur around $224. The trade is considered a risk-defined strategy with a defined maximum loss, which is acceptable if the market moves against the trade. The speaker also mentions a calendar spread as a potential alternative, which could be used if the market breaks down.

Implied Volatility and Earnings Cycles

The speaker discusses how implied volatility spikes around earnings announcements, with Texas Instruments showing a 10% implied volatility for the week, which is higher than the typical 5-10% range. This indicates heightened market attention and potential for significant price movements post-earnings. The 4-day cycle implied move of 28 points against a $287 stock is noted as a high volatility reading, suggesting that traders should be cautious and consider the potential for large price swings. The speaker also highlights that the 11-day cycle has a lower implied volatility, which can be used to reduce cost basis in trades.

Implied Volatility Crush Strategy

A strategy involves crushing implied volatility by 20 percentage points to bring it down to 65%, which can lead to significant P&L gains. This is particularly effective when there is a clear target level, such as $350, and the trade is executed with a low defined risk outlay. The strategy relies on the expectation of post-earnings movement and the normalization of near-term implied volatility relative to later-dated cycles.

Defined Risk Trade Strategy

A defined risk trade strategy involves utilizing vertical spreads to limit potential losses. The speaker discusses selling a vertical put spread (selling the 795s and buying the 790s) which provides a defined risk profile with a maximum loss of $320. This strategy allows for a defined risk, enabling traders to manage their risk effectively and sleep at night without worrying about large, unexpected price movements. The trade also offers a potential profit of $180, with the ability to cut losses if the trade direction is incorrect.

Skew Direction and Market Sentiment

The speaker discusses how skew in the market is trading to the downside, indicating that put options are more expensive relative to call options. This suggests a bearish sentiment, as the market is pricing in a higher probability of downward price movements. The skew is attributed to falling prices, implying that the market is reacting to declining asset values. The speaker notes that skew was previously to the upside when prices were rising, highlighting the inverse relationship between price trends and skew direction.

Risk-defined trades in uncertain markets

The speaker suggests using risk-defined trades, such as put spreads, when there is uncertainty about a product's behavior. These trades allow for defined maximum losses, which can be tolerated if the trade setup is well-considered. The rationale is that in uncertain conditions, traders should focus on strategies that limit potential losses while still allowing for profit if the market moves in the intended direction.

How can traders reduce cost basis in earnings trades?

The speaker suggests using a calendar spread strategy, such as buying the 11-day cycle option and selling the 4-day cycle option at the same strike price. This allows traders to collect a significant amount of cost basis reduction by taking advantage of the difference in implied volatility between the two cycles.

TakeawayTraders can reduce cost basis by using calendar spreads that capitalize on the difference in implied volatility between short-term and longer-term options.

What is the expected move on the options chain for Micron?

The expected move on the options chain for Micron involves significant ranges, with the potential to capture a decent amount of premium. Selling the 710 and buying the 700 could yield a credit of slightly over $2.

TakeawayThe expected move on the options chain for Micron involves significant ranges, with the potential to capture a decent amount of premium. Selling the 710 and buying the 700 could yield a credit of slightly over $2.

What is the risk-to-reward ratio for the trade idea?

The risk-to-reward ratio for the trade idea is approximately 1:1.5, with a potential profit of $180 and a maximum loss of $320.

TakeawayThe trade idea has a defined risk-to-reward ratio, which is important for managing risk effectively.

What is the current skew direction in the market?

The skew is currently trading to the downside, indicating that put options are more expensive relative to call options. This suggests a bearish sentiment, as the market is pricing in a higher probability of downward price movements.

TakeawayThe skew direction can provide insights into market sentiment and potential price movements.

What is the maximum profit for the put spread?

The maximum profit for the put spread is $130.

TakeawayThe maximum profit for the put spread is $130, which is a key parameter in the trade setup.