Hey Advanced Traders!
LEAPS
If you have LEAPS options, like MSFT and AAPL, that you purchased 1 or 2 quarters ago and you are profitable, you can consider selling some or all of them. Since we are about a week before major companies start to deliver their quarterly reports, IV is higher during these couple of days, which means the extrinsic portion of your LEAPS are inflated, thus more expensive. Once you obtain your profits, I would keep it as cash for now to see what companies did well, so you can reallocate your premiums into more long-term holds.
If you are red with some of your V or MA LEAPS options, you can hold onto them for a little longer, especially if you purchased them when they were around a delta 0.80. For those of you who have been selling calls against your LEAPS options, great job to you! Remember that you have been lowering the cost basis of your LEAPS options and it is important that you keep track of your cost basis.
Bear Call Spreads
During this time of higher IV, you can consider setting up some bear call spreads. One stock that I'm eyeing on is AMD.
AMD is expected to report their earnings this Tuesday, October 26, after market close.
What you can consider doing is setting up a bear call spread around 15-30 minutes before the market closes on Tuesday.
I recommend selecting the November 19 expiration date. I recommend purchasing around a delta 0.01-0.05 call option, that will likely cost around $5-15, and may be around the $175 strike. I would then sell around a delta 0.15 call option, that will likely cost around $100, and may be around the $140 strike. I would then purchase 25 shares to begin with and set a buy-stop-order of 75 shares to cover yourself in case the stock surpasses the strike of your second leg.
I want to set up these bear call spreads on AMD since the stock has taken off quiet a bit and may want to pull back in the short-term. Also, I want to capitalize on the high IV environment, which is favorable for an options seller.
Right after earnings, AMD will most likely experience a volatility crush, meaning that the extrinsic value of your two options will rapidly shrink down in value. If AMD stays the same, goes down, or even just barely rises up after earnings, you will most likely be profitable from the trade. If this scenario happens, you can close out your positions on Wednesday morning and lock in your profits. Again, I would keep the profits as cash and to wait until some of your favorite companies deliver their reports. You can then purchase more long-term holds and compound your portfolio.
Risks
Keep in mind that there is always a risk of AMD having a gap up the next day, which is why I'm choosing to sell a second leg that is around $20 above the current price and buying 25 shares to benefit from the rise up. If AMD does have a significant gap up above the strike of your second leg, your brokerage account may not trigger your buy-stop-order, meaning that you will have to manually purchase shares to cover yourself. If you feel that this is a concern for you, I recommend that you sit out on this trade and wait to see what happens to AMD after earnings.
Again, feel free to tweak the numbers to your personal risk tolerance.
Happy trading and investing!
Steve and the Call to Leap Team
The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.
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