smasty 10:28 am on Monday, July 23, 2018

LMT Earnings

STO Sep 280 put @1.35 x5
BTO Sep 305/295 put debit spread @2.12 x 1
Break even: 277.08 13.3% down from spot, 5x expected move

MamaCash 10:43 am on Monday, July 23, 2018

Do you sometimes buy a protective put to cover your short puts on these trades?
- smasty 10:45 am on Monday, July 23, 2018
  
  This is my new “stair step” trade (idea from Matt @ Theo). Nicely extends downside range and adds a lot of profit potential on a drop.
  - smasty 10:46 am on Monday, July 23, 2018
    
    After the vol crush I will sometimes buy a garbage put beyond break even to cut the margin while I wait for profit to come in on theta decay
  - MamaCash 10:47 am on Monday, July 23, 2018
    
    So no protective puts. Looks good. Thx.
    - smasty 10:51 am on Monday, July 23, 2018
      
      Also, LMT tends to not have very big vol crushes, so this might stay an active trade for awhile. 2-3% vol crush is average.
fuzzballl 12:27 pm on Monday, July 23, 2018

Interesting idea….is this correct?

Here’s my confusion: (Break even: 277.08 13.3% down from spot, 5x expected move)

If LMT drops any at all on earnings the trade will be initially underwater but as long as it’s above 277 at Sep expiration it’ll make money. The breakeven calculated in September is roughly twice the expected move between now and then.
- smasty 12:41 pm on Monday, July 23, 2018
  
  Yep looks about right. At the time I did the trade the earnings EM was $7.90 and spot was around $320. So my profit range was about 5.4x the expected move. Yes you are right, a drop and volatility will result in short term loss, but with very high theta to overcome that loss. It is a duration trade using the higher vol around earnings for a wide profit range.
  - fuzzballl 12:46 pm on Monday, July 23, 2018
    
    Thanks! Really enjoy watching these and trying to follow along…LOL
    - smasty 12:51 pm on Monday, July 23, 2018
      
      As I was just saying to @kathycon MamaCash…this only takes $7500 margin in my PM acct, but I size all naked puts for assignment no matter how far away they be 🙂
      - MamaCash 12:52 pm on Monday, July 23, 2018
        
        Unfortunately, this trade takes $140k of buying power in my IRA. Wish I could but can’t on this one.
        
        fuzzballl 12:54 pm on Monday, July 23, 2018
        
        My example above was a portfolio margin account so showing around 7k. I didn’t set it up in an IRA but assumed it was a little pricey.
        
        hcgdavis 4:00 pm on Wednesday, July 25, 2018
        
        I don’t think any of may accounts are big enough for that assignment 🙂
        
        smasty 4:04 pm on Wednesday, July 25, 2018
        
        It pretty much takes portfolio margin for these 🙂 It’s even hard to buy garbage wings in high vol and make the numbers work.

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