CallDiagonal | Options Bistro

ADSK Fill
Got a fill on ADSK. This is a 2 part trade. Screen shot is below if you want to load it in to the analyze tab (see caution below)
Part 1: #PutRatioSpread Bought to open 5x Dec 1 121 put, Sold to open 10x 120 put for net credit of .80
Part 2: #CallDiagonal Sold to open 138 call x 5 for 1.06, Bought to open Dec 29 145 call for .91, net credit of .15
A lot of people don’t realize that with #TimeSpreads (like diagonals and calendars) it’s impossible to know what the max profit will be. You cannot trust your blue P/L line in TOS…that line will move up and down based on volatility, and with the long call out in the future–the best you can do is to model an x% vol crush in TOS (15-25% usually) to make sure your trade isn’t killed by lower vol. In the morning, that blue line will have contracted, so what can look like a great trade the day before earnings, can get very deflated upon market open, and many people don’t understand why it’s tricky to work time spreads around a known vol crush. But I’ve found credit diagonals, particularly, to be wonderful add-ons for earnings for increasing range, max profit, and balancing deltas.

The Put Ratio Spread is one of my all time favorite trades. It is a net long-delta trade that can provide a wonderful profit range. Really, the put ratio spread is identical to a Jade Lizard. If you put the two graphs side by side, they are the same. In fact the Jade Lizard creators at Tasty Trade have started doing JL’s using all one side of the option chain; puts for regular, calls for reversed. Put ratio spreads, since they are sold for a net credit, have no upside risk.

The Call Diagonal is a nod to all the bearish fund flow I’ve been watching on ADSK. There are a lot of Dec 120 puts being bought by funds, and the Dec 130 and 140 calls are being sold. So I designed the call diagonal spread around that 140 line.

There is risk on both sides of this trade. TOS is showing break even at 117.88/145.64. In reality that upper break even number will come in quite a bit in the morning. I prefer to consider the risk of a naked put as “long stock assignment”–I never consider it to be undefined risk. The upside of this trade is defined risk, but it’s wide, there will be pain if ADSK jumps over 140.00. Once again, pre-market defense (on a run up) will be buying some shares in after hours.

#Earnings

I’ve been a big earnings trader for a long time. Everyone says “oh earnings, it’s just a crapshoot!” Well, yes and no. My 3rd Quarter track record was 74.4% wins with 5-digit net gains on earnings trades. I backed off on doing a lot of earnings in Q4 just because I needed a rest. Earnings, done right, is hard work. You are up at 4am to watch reports, you don’t stop working until after 6pm. But I’m now rested up and ready to do some earnings trades into the end of the year. I thought I’d share my process here before showing you my ADSK trade. I do this on every earnings setup as my analysis design process:

1. I begin by looking at historical standard deviation moves and comparing them to what market makers are pricing in. This is “real math” standard deviations, not the “standard deviations” that some people like to toss out. I pay particular attention to black swan events in the last 2 years.
2. Then I look at average % moves over the last year
3. Then I look at the MM expected move
4. I note the expected report results for eps/whisper/revenue
5. I look back in my trade journal to see how I traded previous quarters and how it worked out
6. I do an extensive technical chart analysis
7. I use the CMLViz backtester to see what trades have historically worked for earnings (i.e. it will show if 30 delta naked puts have a 100% historical win rate for the 1 day of an earnings trade).
8. I subscribe to “Trade Alert” which shows where “smart money” (large funds) is placing their earnings bets. So I do a sentiment and options chain analysis going back a week.
9. Then I’ll begin design work. Some stocks tend to have a mini vol crush before the close (before report), so I’ll put those trades on earlier. Stocks where vol stays bid before the close I’ll wait later in the day for opening trades. My style is to be much less directional and more about wide profit ranges. Naked calls don’t bother me when I know I’ll be able to buy stock after hours. I never seem to be able to short stock after hours, there’s never any to borrow. I size everything for my risk tolerance.

I’ve got an ADSK design I’m working up that I’ll report on when filled. I’m looking at a #PutRatio coupled with a #CallDiagonal. There is a lot of bearish sentiment by funds in ADSK this week, which is surprising given the strength of the chart–but clearly holders are nervous going into this report.
Sue