{"id":50024,"date":"2020-07-31T13:47:35","date_gmt":"2020-07-31T17:47:35","guid":{"rendered":"https:\/\/www.smbtraining.com\/blog\/?p=50024"},"modified":"2020-07-31T13:47:35","modified_gmt":"2020-07-31T17:47:35","slug":"the-incredible-effect-of-falling-options-volatility-after-earnings","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/the-incredible-effect-of-falling-options-volatility-after-earnings","title":{"rendered":"The Incredible Effect of Falling Options Volatility After Earnings"},"content":{"rendered":"

During earnings season, day and swing traders often find their best profit opportunities each quarter, but very few traders understand the opportunities that are available by using options spreads to take advantage of the big moves that surround a stock after it\u2019s quarterly earnings report is released. In this video, we\u2019ll show you an incredible example of an options spread trade that could have been taken before TSLA released its earnings report recently and we\u2019ll explain why this technique is so powerful.<\/p>\nView Video Transcript<\/strong><\/span>

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every quarter day and swing traders get<\/div>\n<\/div>\n<\/div>\n
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their best opportunities to make money<\/div>\n<\/div>\n<\/div>\n
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during earnings season when stocks<\/div>\n<\/div>\n<\/div>\n
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traditionally make<\/div>\n<\/div>\n<\/div>\n
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outsized moves in reaction to the<\/div>\n<\/div>\n<\/div>\n
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earnings releases of the stocks they<\/div>\n<\/div>\n<\/div>\n
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follow<\/div>\n<\/div>\n<\/div>\n
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i’m seth freuberg the head trader of smb<\/div>\n<\/div>\n<\/div>\n
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capitals options trading desk here in<\/div>\n<\/div>\n<\/div>\n
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manhattan and the traders on our desk<\/div>\n<\/div>\n<\/div>\n
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are<\/div>\n<\/div>\n<\/div>\n
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constantly looking for unique ways of<\/div>\n<\/div>\n<\/div>\n
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profiting from the volatility that takes<\/div>\n<\/div>\n<\/div>\n
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place<\/div>\n<\/div>\n<\/div>\n
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after stocks release their earnings<\/div>\n<\/div>\n<\/div>\n
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reports and how the options market<\/div>\n<\/div>\n<\/div>\n
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takes those anticipated moves into<\/div>\n<\/div>\n<\/div>\n
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consideration<\/div>\n<\/div>\n<\/div>\n
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if you’re looking for an incredible<\/div>\n<\/div>\n<\/div>\n
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example of just how dramatic the profit<\/div>\n<\/div>\n<\/div>\n
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opportunities can get by using option<\/div>\n<\/div>\n<\/div>\n
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spreads during earnings season<\/div>\n<\/div>\n<\/div>\n
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then stick around because you’re not<\/div>\n<\/div>\n<\/div>\n
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going to believe what happens in this<\/div>\n<\/div>\n<\/div>\n
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example that i’m about to demonstrate<\/div>\n<\/div>\n<\/div>\n
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hi i’m seth freyberg and i’m the head<\/div>\n<\/div>\n<\/div>\n
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trader of smb capitals options trading<\/div>\n<\/div>\n<\/div>\n
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desk<\/div>\n<\/div>\n<\/div>\n
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smb capital is a proprietary trading<\/div>\n<\/div>\n<\/div>\n
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firm located in midtown manhattan<\/div>\n<\/div>\n<\/div>\n
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and we provide capital for options and<\/div>\n<\/div>\n<\/div>\n
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equity traders from all over the world<\/div>\n<\/div>\n<\/div>\n
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trading both remotely<\/div>\n<\/div>\n<\/div>\n
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and in our offices here in new york city<\/div>\n<\/div>\n<\/div>\n
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now i’d like to suggest that you click<\/div>\n<\/div>\n<\/div>\n
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on our subscribe button<\/div>\n<\/div>\n<\/div>\n
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right now so that you don’t miss any of<\/div>\n<\/div>\n<\/div>\n
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the free trading videos that we’re<\/div>\n<\/div>\n<\/div>\n
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producing<\/div>\n<\/div>\n<\/div>\n
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for traders and investors all over the<\/div>\n<\/div>\n<\/div>\n
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world they’re really very valuable<\/div>\n<\/div>\n<\/div>\n
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just about the craziest trading stock<\/div>\n<\/div>\n<\/div>\n
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over this past year has been tesla<\/div>\n<\/div>\n<\/div>\n
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and tesla is a stock that’s constantly<\/div>\n<\/div>\n<\/div>\n
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making large moves<\/div>\n<\/div>\n<\/div>\n
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so it should be no surprise that as the<\/div>\n<\/div>\n<\/div>\n
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stock was approaching its quarterly<\/div>\n<\/div>\n<\/div>\n
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earnings report in july<\/div>\n<\/div>\n<\/div>\n
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that the entire financial world was<\/div>\n<\/div>\n<\/div>\n
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expecting tesla<\/div>\n<\/div>\n<\/div>\n
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to have a huge reaction to its earnings<\/div>\n<\/div>\n<\/div>\n
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report now when that happens<\/div>\n<\/div>\n<\/div>\n
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then that same anticipation of a huge<\/div>\n<\/div>\n<\/div>\n
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move right after the earnings report<\/div>\n<\/div>\n<\/div>\n
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is released gets translated into the<\/div>\n<\/div>\n<\/div>\n
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pricing of<\/div>\n<\/div>\n<\/div>\n
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options so let’s drill down to<\/div>\n<\/div>\n<\/div>\n
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understand this phenomenon<\/div>\n<\/div>\n<\/div>\n
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now most of you probably know something<\/div>\n<\/div>\n<\/div>\n
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about options but but just for a quick<\/div>\n<\/div>\n<\/div>\n
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review and this will be fast<\/div>\n<\/div>\n<\/div>\n
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what’s known as a call option on a stock<\/div>\n<\/div>\n<\/div>\n
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entitles the buyer of that option to<\/div>\n<\/div>\n<\/div>\n
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purchase 100 shares of that stock at a<\/div>\n<\/div>\n<\/div>\n
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certain price called<\/div>\n<\/div>\n<\/div>\n
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the strike price of that option<\/div>\n<\/div>\n<\/div>\n
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regardless of what price<\/div>\n<\/div>\n<\/div>\n
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the stock is actually trading at what’s<\/div>\n<\/div>\n<\/div>\n
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called a put option on the other hand<\/div>\n<\/div>\n<\/div>\n
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entitles the buyer of that put<\/div>\n<\/div>\n<\/div>\n
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to sell 100 shares of the stock he owns<\/div>\n<\/div>\n<\/div>\n
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at the strike price of that put again<\/div>\n<\/div>\n<\/div>\n
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regardless<\/div>\n<\/div>\n<\/div>\n
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of what price the stock is trading the<\/div>\n<\/div>\n<\/div>\n
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buyer of the option pays what’s called a<\/div>\n<\/div>\n<\/div>\n
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premium to the seller of the option<\/div>\n<\/div>\n<\/div>\n
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because the seller of the option is<\/div>\n<\/div>\n<\/div>\n
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taking the risk<\/div>\n<\/div>\n<\/div>\n
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that the stock will go past the strike<\/div>\n<\/div>\n<\/div>\n
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price of the option<\/div>\n<\/div>\n<\/div>\n
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in which case the buyer can exercise his<\/div>\n<\/div>\n<\/div>\n
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option so in the case of a call<\/div>\n<\/div>\n<\/div>\n
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even if the stock has gone way above the<\/div>\n<\/div>\n<\/div>\n
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strike price of the call<\/div>\n<\/div>\n<\/div>\n
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the call buyer can exercise his right to<\/div>\n<\/div>\n<\/div>\n
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buy 100 shares<\/div>\n<\/div>\n<\/div>\n
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at the strike price in other words he’s<\/div>\n<\/div>\n<\/div>\n
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entitled to buy the shares<\/div>\n<\/div>\n<\/div>\n
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way below market he could flip them the<\/div>\n<\/div>\n<\/div>\n
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next minute and make a huge profit on<\/div>\n<\/div>\n<\/div>\n
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those shares in that case<\/div>\n<\/div>\n<\/div>\n
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or conversely on the put option even if<\/div>\n<\/div>\n<\/div>\n
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the market goes way below the strike<\/div>\n<\/div>\n<\/div>\n
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price of that put option the buyer of<\/div>\n<\/div>\n<\/div>\n
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that put option<\/div>\n<\/div>\n<\/div>\n
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has the right to sell his shares of that<\/div>\n<\/div>\n<\/div>\n
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stock at the strike price of the put<\/div>\n<\/div>\n<\/div>\n
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option that he’s bought<\/div>\n<\/div>\n<\/div>\n
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even if the stock price has gone way<\/div>\n<\/div>\n<\/div>\n
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below the strike price<\/div>\n<\/div>\n<\/div>\n
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of the put which of course saves him a<\/div>\n<\/div>\n<\/div>\n
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lot of money compared to whether he<\/div>\n<\/div>\n<\/div>\n
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didn’t own the put and he’s stuck<\/div>\n<\/div>\n<\/div>\n
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suffering a much larger loss on his<\/div>\n<\/div>\n<\/div>\n
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shares because<\/div>\n<\/div>\n<\/div>\n
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their price has gone way below where<\/div>\n<\/div>\n<\/div>\n
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they were trading before<\/div>\n<\/div>\n<\/div>\n
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but he had no protection against that<\/div>\n<\/div>\n<\/div>\n
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happening so all other things being<\/div>\n<\/div>\n<\/div>\n
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equal when a stock price goes<\/div>\n<\/div>\n<\/div>\n
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up a call option for that stock will go<\/div>\n<\/div>\n<\/div>\n
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up<\/div>\n<\/div>\n<\/div>\n
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because the right becomes naturally more<\/div>\n<\/div>\n<\/div>\n
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valuable to the buyer<\/div>\n<\/div>\n<\/div>\n
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and when a stock price goes down a put<\/div>\n<\/div>\n<\/div>\n
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option for that stock will go<\/div>\n<\/div>\n<\/div>\n
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up because that rate naturally becomes<\/div>\n<\/div>\n<\/div>\n
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more valuable to the buyer<\/div>\n<\/div>\n<\/div>\n
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so those are the basics of call and put<\/div>\n<\/div>\n<\/div>\n
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options<\/div>\n<\/div>\n<\/div>\n
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okay with that as background one of the<\/div>\n<\/div>\n<\/div>\n
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ways that options traders like to<\/div>\n<\/div>\n<\/div>\n
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measure<\/div>\n<\/div>\n<\/div>\n
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how much of a move the market is<\/div>\n<\/div>\n<\/div>\n
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expecting is by looking at the<\/div>\n<\/div>\n<\/div>\n
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options that have strike prices very<\/div>\n<\/div>\n<\/div>\n
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close to the market price of the stock<\/div>\n<\/div>\n<\/div>\n
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in question<\/div>\n<\/div>\n<\/div>\n
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so let’s go back to june 17th which is<\/div>\n<\/div>\n<\/div>\n
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more than a month before tesla’s<\/div>\n<\/div>\n<\/div>\n
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second quarter earnings are going to be<\/div>\n<\/div>\n<\/div>\n
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released and as you can see<\/div>\n<\/div>\n<\/div>\n
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tesla is trading at 991.80 having rally<\/div>\n<\/div>\n<\/div>\n
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back<\/div>\n<\/div>\n<\/div>\n
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from its mid-march lows of under 400<\/div>\n<\/div>\n<\/div>\n
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so tesla has more than doubled in three<\/div>\n<\/div>\n<\/div>\n
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months on top of which it blasted<\/div>\n<\/div>\n<\/div>\n
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through its all-time highs<\/div>\n<\/div>\n<\/div>\n
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which it had hit before the pandemic<\/div>\n<\/div>\n<\/div>\n
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struck<\/div>\n<\/div>\n<\/div>\n
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and so now let’s take a look at the 990<\/div>\n<\/div>\n<\/div>\n
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options on that day<\/div>\n<\/div>\n<\/div>\n
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on the options chain that is expiring 10<\/div>\n<\/div>\n<\/div>\n
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days from that day<\/div>\n<\/div>\n<\/div>\n
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on june 26 and as you can see the 990<\/div>\n<\/div>\n<\/div>\n
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strike<\/div>\n<\/div>\n<\/div>\n
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price is the closest to the market price<\/div>\n<\/div>\n<\/div>\n
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and as you can see the call of that<\/div>\n<\/div>\n<\/div>\n
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strike the at the money call<\/div>\n<\/div>\n<\/div>\n
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is priced at 37.97<\/div>\n<\/div>\n<\/div>\n
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whereas the at the money put is priced<\/div>\n<\/div>\n<\/div>\n
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at 37.32<\/div>\n<\/div>\n<\/div>\n
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which incidentally makes sense because<\/div>\n<\/div>\n<\/div>\n
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on volatile stocks pretty much anything<\/div>\n<\/div>\n<\/div>\n
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can happen and so<\/div>\n<\/div>\n<\/div>\n
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the market pro is pricing the risk of a<\/div>\n<\/div>\n<\/div>\n
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rally on the stock<\/div>\n<\/div>\n<\/div>\n
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at about the same price that is pricing<\/div>\n<\/div>\n<\/div>\n
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in a sell-off on that stock and so<\/div>\n<\/div>\n<\/div>\n
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if you add that up the total cost of<\/div>\n<\/div>\n<\/div>\n
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both the call<\/div>\n<\/div>\n<\/div>\n
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and the put it comes to 75.29 now<\/div>\n<\/div>\n<\/div>\n
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let’s move forward to eight days before<\/div>\n<\/div>\n<\/div>\n
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earnings<\/div>\n<\/div>\n<\/div>\n
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and as you can see tesla has rallied<\/div>\n<\/div>\n<\/div>\n
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again now almost<\/div>\n<\/div>\n<\/div>\n
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quadrupled its price from the depths of<\/div>\n<\/div>\n<\/div>\n
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the market crash all the way up to<\/div>\n<\/div>\n<\/div>\n
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1510 and the combined call and put<\/div>\n<\/div>\n<\/div>\n
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premium has now<\/div>\n<\/div>\n<\/div>\n
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skyrocketed from 75.29<\/div>\n<\/div>\n<\/div>\n
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one month earlier now it’s up to<\/div>\n<\/div>\n<\/div>\n
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291.70 that’s a huge price for those<\/div>\n<\/div>\n<\/div>\n
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options<\/div>\n<\/div>\n<\/div>\n
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and reflects dramatically how much risk<\/div>\n<\/div>\n<\/div>\n
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the seller of those calls<\/div>\n<\/div>\n<\/div>\n
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and the seller of those puts is taking<\/div>\n<\/div>\n<\/div>\n
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so when you have a situation as volatile<\/div>\n<\/div>\n<\/div>\n
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as this<\/div>\n<\/div>\n<\/div>\n
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some options traders form an opinion<\/div>\n<\/div>\n<\/div>\n
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from studying the market<\/div>\n<\/div>\n<\/div>\n
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and previous price moves off of earnings<\/div>\n<\/div>\n<\/div>\n
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for this stock<\/div>\n<\/div>\n<\/div>\n
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and similar stocks that the price built<\/div>\n<\/div>\n<\/div>\n
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into those options may be a little<\/div>\n<\/div>\n<\/div>\n
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higher than they need to be<\/div>\n<\/div>\n<\/div>\n
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and that the market is exaggerating the<\/div>\n<\/div>\n<\/div>\n
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potential reaction<\/div>\n<\/div>\n<\/div>\n
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to the earnings report and has gone<\/div>\n<\/div>\n<\/div>\n
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overboard with those premiums<\/div>\n<\/div>\n<\/div>\n
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there are options traders who carefully<\/div>\n<\/div>\n<\/div>\n
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study these things and have a sense of<\/div>\n<\/div>\n<\/div>\n
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whether these prices are higher<\/div>\n<\/div>\n<\/div>\n
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than they have to be and then they take<\/div>\n<\/div>\n<\/div>\n
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advantage of that over pricing by<\/div>\n<\/div>\n<\/div>\n
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selling the call<\/div>\n<\/div>\n<\/div>\n
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and the put at the money as the date of<\/div>\n<\/div>\n<\/div>\n
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earnings is fast approaching<\/div>\n<\/div>\n<\/div>\n
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so let’s say that a trader makes the<\/div>\n<\/div>\n<\/div>\n
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decision to do just that and go ahead<\/div>\n<\/div>\n<\/div>\n
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and sell the 1500 call and sell the 1500<\/div>\n<\/div>\n<\/div>\n
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put<\/div>\n<\/div>\n<\/div>\n
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and collect that 291 dollars in premium<\/div>\n<\/div>\n<\/div>\n
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well<\/div>\n<\/div>\n<\/div>\n
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for reasons that we can discuss on<\/div>\n<\/div>\n<\/div>\n
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another video about how brokers margin<\/div>\n<\/div>\n<\/div>\n
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retail options traders<\/div>\n<\/div>\n<\/div>\n
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you need an unacceptably high level of<\/div>\n<\/div>\n<\/div>\n
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capital in your account to simply<\/div>\n<\/div>\n<\/div>\n
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sell the call and sell to put it the<\/div>\n<\/div>\n<\/div>\n
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money on a stock this volatile<\/div>\n<\/div>\n<\/div>\n
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and so what most traders will do is to<\/div>\n<\/div>\n<\/div>\n
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buy a long call<\/div>\n<\/div>\n<\/div>\n
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and a long put further away from the<\/div>\n<\/div>\n<\/div>\n
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market price and in this case<\/div>\n<\/div>\n<\/div>\n
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the trader could have moved up to the<\/div>\n<\/div>\n<\/div>\n
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1900 call<\/div>\n<\/div>\n<\/div>\n
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400 points above the market and moved<\/div>\n<\/div>\n<\/div>\n
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down 400 points to the<\/div>\n<\/div>\n<\/div>\n
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1100 put and bought those as well now<\/div>\n<\/div>\n<\/div>\n
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this combination<\/div>\n<\/div>\n<\/div>\n
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a short at the money call and a short at<\/div>\n<\/div>\n<\/div>\n
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the money put<\/div>\n<\/div>\n<\/div>\n
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combined with a long call and a long put<\/div>\n<\/div>\n<\/div>\n
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both farther away from the money that<\/div>\n<\/div>\n<\/div>\n
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combination<\/div>\n<\/div>\n<\/div>\n
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is known as an iron butterfly to options<\/div>\n<\/div>\n<\/div>\n
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income traders<\/div>\n<\/div>\n<\/div>\n
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and it is a powerful trade to employ<\/div>\n<\/div>\n<\/div>\n
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before earnings<\/div>\n<\/div>\n<\/div>\n
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as you’re about to see i wanted to let<\/div>\n<\/div>\n<\/div>\n
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you know that there really are<\/div>\n<\/div>\n<\/div>\n
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sound viable long-term techniques for<\/div>\n<\/div>\n<\/div>\n
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trading options for income and in fact<\/div>\n<\/div>\n<\/div>\n
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we’re currently running<\/div>\n<\/div>\n<\/div>\n
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a two-hour free intensive workshop at<\/div>\n<\/div>\n<\/div>\n
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the moment where we’ll be teaching you<\/div>\n<\/div>\n<\/div>\n
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three of those strategies that real<\/div>\n<\/div>\n<\/div>\n
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professional options traders use<\/div>\n<\/div>\n<\/div>\n
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including<\/div>\n<\/div>\n<\/div>\n
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a really simple but incredibly effective<\/div>\n<\/div>\n<\/div>\n
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technique<\/div>\n<\/div>\n<\/div>\n
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that some of the greatest investors in<\/div>\n<\/div>\n<\/div>\n
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the world like warren buffett use<\/div>\n<\/div>\n<\/div>\n
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all the time plus an options trading<\/div>\n<\/div>\n<\/div>\n
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strategy that has a<\/div>\n<\/div>\n<\/div>\n
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statistical eighty percent probability<\/div>\n<\/div>\n<\/div>\n
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of profit month in and month out<\/div>\n<\/div>\n<\/div>\n
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plus an option strategy that you can<\/div>\n<\/div>\n<\/div>\n
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employ with a stock that you like where<\/div>\n<\/div>\n<\/div>\n
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you’ll make your target profit<\/div>\n<\/div>\n<\/div>\n
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whether the stock goes up goes nowhere<\/div>\n<\/div>\n<\/div>\n
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or even goes down a small percentage so<\/div>\n<\/div>\n<\/div>\n
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if those strategies would be of interest<\/div>\n<\/div>\n<\/div>\n
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to you then you should check out<\/div>\n<\/div>\n<\/div>\n
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the free options class that we’re<\/div>\n<\/div>\n<\/div>\n
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currently running just go ahead and<\/div>\n<\/div>\n<\/div>\n
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click the link that should be appearing<\/div>\n<\/div>\n<\/div>\n
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now<\/div>\n<\/div>\n<\/div>\n
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at the top right corner of your screen<\/div>\n<\/div>\n<\/div>\n
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that will open the free registration<\/div>\n<\/div>\n<\/div>\n
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page in a new window<\/div>\n<\/div>\n<\/div>\n
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so don’t worry you won’t lose this video<\/div>\n<\/div>\n<\/div>\n
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or you can just head on over to<\/div>\n<\/div>\n<\/div>\n
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optionsclass.com<\/div>\n<\/div>\n<\/div>\n
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to register for this free intensive<\/div>\n<\/div>\n<\/div>\n
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workshop it’s a rare opportunity<\/div>\n<\/div>\n<\/div>\n
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for retail traders and investors to<\/div>\n<\/div>\n<\/div>\n
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learn directly from wall street traders<\/div>\n<\/div>\n<\/div>\n
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but that’s exactly what you’ll be<\/div>\n<\/div>\n<\/div>\n
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getting<\/div>\n<\/div>\n<\/div>\n
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through this free online workshop so<\/div>\n<\/div>\n<\/div>\n
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click the link to sign up now and don’t<\/div>\n<\/div>\n<\/div>\n
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miss<\/div>\n<\/div>\n<\/div>\n
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it getting back to the iron butterfly<\/div>\n<\/div>\n<\/div>\n
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that we’ve constructed leading into<\/div>\n<\/div>\n<\/div>\n
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tesla’s earnings report<\/div>\n<\/div>\n<\/div>\n
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let’s first analyze the cash flow of the<\/div>\n<\/div>\n<\/div>\n
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transaction that we’ve entered into<\/div>\n<\/div>\n<\/div>\n
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so first of all we’ll account for the<\/div>\n<\/div>\n<\/div>\n
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short call at 1500 and as you can see<\/div>\n<\/div>\n<\/div>\n
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that was priced at<\/div>\n<\/div>\n<\/div>\n
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147.90 as we said but remember<\/div>\n<\/div>\n<\/div>\n
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that represents the the right to buy 100<\/div>\n<\/div>\n<\/div>\n
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shares of tesla<\/div>\n<\/div>\n<\/div>\n
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at 1500 so you have to multiply that by<\/div>\n<\/div>\n<\/div>\n
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100<\/div>\n<\/div>\n<\/div>\n
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to arrive at the total cash flow of 14<\/div>\n<\/div>\n<\/div>\n
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790<\/div>\n<\/div>\n<\/div>\n
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and you do the same for the price of the<\/div>\n<\/div>\n<\/div>\n
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put which<\/div>\n<\/div>\n<\/div>\n
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you see brings in 14 380 but remember<\/div>\n<\/div>\n<\/div>\n
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now we bought those protective calls and<\/div>\n<\/div>\n<\/div>\n
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puts<\/div>\n<\/div>\n<\/div>\n
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and those were a cost to us and so we<\/div>\n<\/div>\n<\/div>\n
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subtract the cost of those from the cash<\/div>\n<\/div>\n<\/div>\n
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flow<\/div>\n<\/div>\n<\/div>\n
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to arrive at a net cash flow number of<\/div>\n<\/div>\n<\/div>\n
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twenty two thousand<\/div>\n<\/div>\n<\/div>\n
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four thirty one and those flow right<\/div>\n<\/div>\n<\/div>\n
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into our account instantly after the<\/div>\n<\/div>\n<\/div>\n
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transaction<\/div>\n<\/div>\n<\/div>\n
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now because tesla is a high price stock<\/div>\n<\/div>\n<\/div>\n
\n
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the options are also expensive<\/div>\n<\/div>\n<\/div>\n
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and for reasons that we can explain in a<\/div>\n<\/div>\n<\/div>\n
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video on margins<\/div>\n<\/div>\n<\/div>\n
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the total capital which is the maximum<\/div>\n<\/div>\n<\/div>\n
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risk on this trade<\/div>\n<\/div>\n<\/div>\n
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is 17 569 now<\/div>\n<\/div>\n<\/div>\n
\n
\n
let’s move to the day before earnings<\/div>\n<\/div>\n<\/div>\n
\n
\n
which is july 22nd and you can see<\/div>\n<\/div>\n<\/div>\n
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that tesla has now rallied to 1592 in<\/div>\n<\/div>\n<\/div>\n
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anticipation<\/div>\n<\/div>\n<\/div>\n
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\n
of a solid earnings report so that<\/div>\n<\/div>\n<\/div>\n
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afternoon<\/div>\n<\/div>\n<\/div>\n
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\n
earnings were announced and let’s take a<\/div>\n<\/div>\n<\/div>\n
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look at what happens to the trade<\/div>\n<\/div>\n<\/div>\n
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the next day well the stock is actually<\/div>\n<\/div>\n<\/div>\n
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\n
selling off after the earnings report<\/div>\n<\/div>\n<\/div>\n
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\n
and mid afternoon it happened to sell<\/div>\n<\/div>\n<\/div>\n
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right back down to 1500<\/div>\n<\/div>\n<\/div>\n
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which happens to be convenient because<\/div>\n<\/div>\n<\/div>\n
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we can now compare<\/div>\n<\/div>\n<\/div>\n
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the value of the trade the day after<\/div>\n<\/div>\n<\/div>\n
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earnings from its value on the day we<\/div>\n<\/div>\n<\/div>\n
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entered<\/div>\n<\/div>\n<\/div>\n
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into it eight days earlier when the<\/div>\n<\/div>\n<\/div>\n
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premiums were much higher in<\/div>\n<\/div>\n<\/div>\n
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anticipation<\/div>\n<\/div>\n<\/div>\n
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of an unknown reaction to an earnings<\/div>\n<\/div>\n<\/div>\n
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report<\/div>\n<\/div>\n<\/div>\n
\n
\n
and so as you can see the short call and<\/div>\n<\/div>\n<\/div>\n
\n
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the short put have dramatically shrunken<\/div>\n<\/div>\n<\/div>\n
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\n
in value<\/div>\n<\/div>\n<\/div>\n
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\n
and if you add up their current value it<\/div>\n<\/div>\n<\/div>\n
\n
\n
comes to 66.15<\/div>\n<\/div>\n<\/div>\n
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down from the 290 170 value<\/div>\n<\/div>\n<\/div>\n
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that we received for selling those two<\/div>\n<\/div>\n<\/div>\n
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originally<\/div>\n<\/div>\n<\/div>\n
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now and this is the crucial point of<\/div>\n<\/div>\n<\/div>\n
\n
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this video you’re probably asking<\/div>\n<\/div>\n<\/div>\n
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why did those values drop so much<\/div>\n<\/div>\n<\/div>\n
\n
\n
and the answer simple the earnings were<\/div>\n<\/div>\n<\/div>\n
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released and the market has now<\/div>\n<\/div>\n<\/div>\n
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spoken and it turns out that at this<\/div>\n<\/div>\n<\/div>\n
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moment the market’s valuing this stock<\/div>\n<\/div>\n<\/div>\n
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at exactly the same price as when we<\/div>\n<\/div>\n<\/div>\n
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enter the trade but there’s<\/div>\n<\/div>\n<\/div>\n
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one giant difference as far as the<\/div>\n<\/div>\n<\/div>\n
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options are concerned<\/div>\n<\/div>\n<\/div>\n
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and that is the uncertainty is now over<\/div>\n<\/div>\n<\/div>\n
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the market had a negative reaction to<\/div>\n<\/div>\n<\/div>\n
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the earnings report<\/div>\n<\/div>\n<\/div>\n
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but not terribly negative the stock<\/div>\n<\/div>\n<\/div>\n
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dropped about 90 points<\/div>\n<\/div>\n<\/div>\n
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but the market was picturing a much<\/div>\n<\/div>\n<\/div>\n
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larger reaction than that<\/div>\n<\/div>\n<\/div>\n
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which is why it charged more than 140<\/div>\n<\/div>\n<\/div>\n
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\n
dollars per share for both the call<\/div>\n<\/div>\n<\/div>\n
\n
\n
and the put when we first enter the<\/div>\n<\/div>\n<\/div>\n
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trade but now<\/div>\n<\/div>\n<\/div>\n
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that the uncertainty is over and the<\/div>\n<\/div>\n<\/div>\n
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market has played out<\/div>\n<\/div>\n<\/div>\n
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\n
a fair amount of its reaction to the<\/div>\n<\/div>\n<\/div>\n
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earning report the options traders are<\/div>\n<\/div>\n<\/div>\n
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now more comfortable they don’t need to<\/div>\n<\/div>\n<\/div>\n
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price in some<\/div>\n<\/div>\n<\/div>\n
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massive move in the future because the<\/div>\n<\/div>\n<\/div>\n
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big marketing the big market moving<\/div>\n<\/div>\n<\/div>\n
\n
\n
event the earnings report<\/div>\n<\/div>\n<\/div>\n
\n
\n
is now behind us so we can drop the<\/div>\n<\/div>\n<\/div>\n
\n
\n
value of the options back to<\/div>\n<\/div>\n<\/div>\n
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more normal levels remember we showed<\/div>\n<\/div>\n<\/div>\n
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you the cost of the tesla options in<\/div>\n<\/div>\n<\/div>\n
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june<\/div>\n<\/div>\n<\/div>\n
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\n
and the at the money call and the at the<\/div>\n<\/div>\n<\/div>\n
\n
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money put were<\/div>\n<\/div>\n<\/div>\n
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combined cost of 75 whereas now after<\/div>\n<\/div>\n<\/div>\n
\n
\n
earnings those same at the money options<\/div>\n<\/div>\n<\/div>\n
\n
\n
have dropped to around 66.<\/div>\n<\/div>\n<\/div>\n
\n
\n
in other words they’ve returned to a<\/div>\n<\/div>\n<\/div>\n
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\n
more normal level<\/div>\n<\/div>\n<\/div>\n
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\n
whereas 10 days before earnings during<\/div>\n<\/div>\n<\/div>\n
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the period of uncertainty<\/div>\n<\/div>\n<\/div>\n
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about what the earnings report will<\/div>\n<\/div>\n<\/div>\n
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bring in the cost of those two at the<\/div>\n<\/div>\n<\/div>\n
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money options was closer to<\/div>\n<\/div>\n<\/div>\n
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\n
300 and so that phenomenon that dropping<\/div>\n<\/div>\n<\/div>\n
\n
\n
of options pricing right after earnings<\/div>\n<\/div>\n<\/div>\n
\n
\n
is what options traders call the vol<\/div>\n<\/div>\n<\/div>\n
\n
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crush<\/div>\n<\/div>\n<\/div>\n
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short for volatility crush and it can<\/div>\n<\/div>\n<\/div>\n
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work out very<\/div>\n<\/div>\n<\/div>\n
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\n
well and very powerfully for you in<\/div>\n<\/div>\n<\/div>\n
\n
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certain cases<\/div>\n<\/div>\n<\/div>\n
\n
\n
so at this point we will almost<\/div>\n<\/div>\n<\/div>\n
\n
\n
certainly close the trade as its very<\/div>\n<\/div>\n<\/div>\n
\n
\n
good fortune that the market has<\/div>\n<\/div>\n<\/div>\n
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\n
returned<\/div>\n<\/div>\n<\/div>\n
\n
\n
to the location of the at the money<\/div>\n<\/div>\n<\/div>\n
\n
\n
calls and the at the money puts right<\/div>\n<\/div>\n<\/div>\n
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\n
after earnings<\/div>\n<\/div>\n<\/div>\n
\n
\n
in addition to which we’re two days out<\/div>\n<\/div>\n<\/div>\n
\n
\n
from expiration so now let’s take a look<\/div>\n<\/div>\n<\/div>\n
\n
\n
at what it would cost us to close this<\/div>\n<\/div>\n<\/div>\n
\n
\n
trade and wrap this up<\/div>\n<\/div>\n<\/div>\n
\n
\n
so basically to close an options trade<\/div>\n<\/div>\n<\/div>\n
\n
\n
you simply reverse each position so if<\/div>\n<\/div>\n<\/div>\n
\n
\n
you’re short of position<\/div>\n<\/div>\n<\/div>\n
\n
\n
you buy that option and if you’re long a<\/div>\n<\/div>\n<\/div>\n
\n
\n
position you<\/div>\n<\/div>\n<\/div>\n
\n
\n
sell that option and so as you can see<\/div>\n<\/div>\n<\/div>\n
\n
\n
when you combine the much more<\/div>\n<\/div>\n<\/div>\n
\n
\n
reasonable cost<\/div>\n<\/div>\n<\/div>\n
\n
\n
of buying back those short options and<\/div>\n<\/div>\n<\/div>\n
\n
\n
receiving that very small amount<\/div>\n<\/div>\n<\/div>\n
\n
\n
for those protective long options which<\/div>\n<\/div>\n<\/div>\n
\n
\n
had almost no value now that they’re 400<\/div>\n<\/div>\n<\/div>\n
\n
\n
points away from the stock price with<\/div>\n<\/div>\n<\/div>\n
\n
\n
two days to go before the options expire<\/div>\n<\/div>\n<\/div>\n
\n
\n
combining all of that you end up with a<\/div>\n<\/div>\n<\/div>\n
\n
\n
profit of over fifteen thousand dollars<\/div>\n<\/div>\n<\/div>\n
\n
\n
and when you do the math again the<\/div>\n<\/div>\n<\/div>\n
\n
\n
original capital requirement<\/div>\n<\/div>\n<\/div>\n
\n
\n
of seventeen thousand five hundred sixty<\/div>\n<\/div>\n<\/div>\n
\n
\n
nine dollars<\/div>\n<\/div>\n<\/div>\n
\n
\n
that’s the denominator so that comes out<\/div>\n<\/div>\n<\/div>\n
\n
\n
to a<\/div>\n<\/div>\n<\/div>\n
\n
\n
90 return in eight days<\/div>\n<\/div>\n<\/div>\n
\n
\n
so the major lesson that i’d like you to<\/div>\n<\/div>\n<\/div>\n
\n
\n
learn from this video is the fact that<\/div>\n<\/div>\n<\/div>\n
\n
\n
if a stock is acting<\/div>\n<\/div>\n<\/div>\n
\n
\n
in an extreme way around earnings there<\/div>\n<\/div>\n<\/div>\n
\n
\n
may be cases where the options market is<\/div>\n<\/div>\n<\/div>\n
\n
\n
so spooked<\/div>\n<\/div>\n<\/div>\n
\n
\n
that it charges insanely high prices for<\/div>\n<\/div>\n<\/div>\n
\n
\n
exposing<\/div>\n<\/div>\n<\/div>\n
\n
\n
the options near the market price to<\/div>\n<\/div>\n<\/div>\n
\n
\n
what could be a very<\/div>\n<\/div>\n<\/div>\n
\n
\n
large price move in those cases it may<\/div>\n<\/div>\n<\/div>\n
\n
\n
make sense to sell those options<\/div>\n<\/div>\n<\/div>\n
\n
\n
instead of buy them entering into a more<\/div>\n<\/div>\n<\/div>\n
\n
\n
conservative<\/div>\n<\/div>\n<\/div>\n
\n
\n
iron butterfly trade and on occasion<\/div>\n<\/div>\n<\/div>\n
\n
\n
spectacular results could take place<\/div>\n<\/div>\n<\/div>\n
\n
\n
like would have happened in this tesla<\/div>\n<\/div>\n<\/div>\n
\n
\n
iron butterfly trade<\/div>\n<\/div>\n<\/div>\n
\n
\n
options income traders are very familiar<\/div>\n<\/div>\n<\/div>\n
\n
\n
with iron butterflies<\/div>\n<\/div>\n<\/div>\n
\n
\n
and how advantageous they can be when<\/div>\n<\/div>\n<\/div>\n
\n
\n
you’ve done your homework<\/div>\n<\/div>\n<\/div>\n
\n
\n
about the movement of stocks around<\/div>\n<\/div>\n<\/div>\n
\n
\n
earnings like professional options<\/div>\n<\/div>\n<\/div>\n
\n
\n
traders do<\/div>\n<\/div>\n<\/div>\n
\n
\n
now just to remind you as i said earlier<\/div>\n<\/div>\n<\/div>\n
\n
\n
if you enjoyed this video<\/div>\n<\/div>\n<\/div>\n
\n
\n
and learned something valuable from it<\/div>\n<\/div>\n<\/div>\n
\n
\n
would like to learn the details of three<\/div>\n<\/div>\n<\/div>\n
\n
\n
real world option strategies that<\/div>\n<\/div>\n<\/div>\n
\n
\n
professional options traders<\/div>\n<\/div>\n<\/div>\n
\n
\n
use all the time then you should check<\/div>\n<\/div>\n<\/div>\n
\n
\n
out the free options class<\/div>\n<\/div>\n<\/div>\n
\n
\n
that we’re currently running just go<\/div>\n<\/div>\n<\/div>\n
\n
\n
ahead and click the link that should be<\/div>\n<\/div>\n<\/div>\n
\n
\n
appearing now at the top right corner of<\/div>\n<\/div>\n<\/div>\n
\n
\n
your screen<\/div>\n<\/div>\n<\/div>\n
\n
\n
that will open the free registration<\/div>\n<\/div>\n<\/div>\n
\n
\n
page in a new window so you won’t lose<\/div>\n<\/div>\n<\/div>\n
\n
\n
this video<\/div>\n<\/div>\n<\/div>\n
\n
\n
don’t worry or you can just head on over<\/div>\n<\/div>\n<\/div>\n
\n
\n
to optionsclass.com<\/div>\n<\/div>\n<\/div>\n
\n
\n
to register for this free intensive<\/div>\n<\/div>\n<\/div>\n
\n
\n
workshop it really is a rare opportunity<\/div>\n<\/div>\n<\/div>\n
\n
\n
for retail traders and investors to<\/div>\n<\/div>\n<\/div>\n
\n
\n
learn directly from wall street traders<\/div>\n<\/div>\n<\/div>\n
\n
\n
but that’s exactly what you’ll be<\/div>\n<\/div>\n<\/div>\n
\n
\n
getting<\/div>\n<\/div>\n<\/div>\n
\n
\n
through this free online workshop so<\/div>\n<\/div>\n<\/div>\n
\n
\n
click the link to sign up now<\/div>\n<\/div>\n<\/div>\n
\n
\n
and don’t miss it and please don’t<\/div>\n<\/div>\n<\/div>\n
\n
\n
forget to click on the subscribe button<\/div>\n<\/div>\n<\/div>\n
\n
\n
right now so you won’t miss free trading<\/div>\n<\/div>\n<\/div>\n
\n
\n
videos that we’re posting constantly<\/div>\n<\/div>\n<\/div>\n
\n
\n
on our channel to help you to improve<\/div>\n<\/div>\n<\/div>\n
\n
\n
your game as an options trader<\/div>\n<\/div>\n<\/div>\n<\/div>\n

\"\"<\/a><\/p>\n

* no relevant positions<\/p>\n","protected":false},"excerpt":{"rendered":"

During earnings season, day and swing traders often find their best profit opportunities each quarter, but very few traders understand the opportunities that are available by using options spreads to take advantage of the big moves that surround a stock after it\u2019s quarterly earnings report is released. In this video, we\u2019ll show you an incredible example of an options spread … Read More<\/a><\/p>\n","protected":false},"author":290,"featured_media":50026,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[4189],"tags":[],"class_list":["post-50024","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-free-daily-trading-video","post_format-post-format-video"],"yoast_head":"\nThe Incredible Effect of Falling Options Volatility After Earnings | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/the-incredible-effect-of-falling-options-volatility-after-earnings\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Incredible Effect of Falling Options Volatility After Earnings | SMB Training\" \/>\n<meta property=\"og:description\" content=\"During earnings season, day and swing traders often find their best profit opportunities each quarter, but very few traders understand the opportunities that are available by using options spreads to take advantage of the big moves that surround a stock after it\u2019s quarterly earnings report is released. In this video, we\u2019ll show you an incredible example of an options spread ... 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