Follow Up on CREE Trade
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Follow Up on CREE Trade

John F. Carter 1/23/2014

Hey everybody, this is John. We are doing the earnings class here live, we are 2 minutes and 21 seconds before the opening bell. So I'm going to explain -- talk about -- CREE here.

So CREE, this was one of the four earnings trade we did CREE, IBM, Coach and Texas Instruments. The expected move here was about 7 bucks. So what we did is we sold $75.00 calls, the $49.00 puts, the $74/80 call spread, the $52/47 put spread. We did butterflies at each leg of the expected move higher, so one standard deviation. And that was to offset any moves in case our naked straddle took some heat. OK.

What we're going to do now is -- we'll see here. We're going to open up in a minute and 39 seconds -- we'll see where CREE kind of opens up and then we're going to have to do some active trade management. What I'm looking at doing is probably pretty immediately, if not sooner, getting out of the 63 put and the 63 call. These suckers right here are going to drop in price immediately. Because the implied volatility is going to go almost immediately from that to you know, down here.

So in a minute and 13 seconds when the market opens I want you to watch for two things. Watch the implied volatility and then watch the open P&L because all these positions are going to go worthless. Now that's not going to help the butterflies but we only risked about 90...I think maybe it was $110.00 on each one. But the rest of these, it'll be kind of like scooping up 20 dollar bills if you're walking down the street. Then, if in a situation like this, it does go beyond the expected move, that's fine. Then we have to set up, at the open, we set up new trades, we set up new call spreads and put spreads to bring in more premium to offset the risk or the heat that we're taking on that.

At this point we're just going to watch CREE because that's the most positions that we have on. And we've got -- I'm going to take a look here...because we do have let's see...IBM and a couple of other ones here too. So we're at 7 seconds...OK. Watch the implied volatility, watch the P&L here, watch the stock...1 and zero. Oh, thank you trade station for that.

All right so it's slowly kind of opening up here. So for CREE we went from you know, obviously flat. The implied volatility here is just kind of settling in. It will drop this 149 percent. It's not accurate, obviously, because the P&L here has just exploded higher, as all that Theta that we sold, remember a lot of people were buying puts and calls yesterday in the hope that CREE would have a big move. We took the opposite sides of those trades. So the first thing I want to do, I want to assess where my risk is on these positions, right.

So my big risk here is going to be of course in the at the money straddles. Now you'll note here that the 63 puts and the 63 calls, they're not at a nickel, OK. And that's not the game we're doing there. All we're doing is the implied volatility crush on those. And of course that was pretty juicy because the premiums were pretty high. So because CREE's heading higher, what I want to do on this is definitely get rid of the calls. We still got a 1300 dollar profit on that. But I want to get rid of the one that it's kind of heading in to. All right. So boom, we're done.

So now I can kind of watch if that thing keeps going higher that put will get a little bit more Theta decay. OK. The butterfly, can't do anything about that. Those are at pretty much max loss. We risked about a 100, 105 dollars on each one. Now the 52/47 put spread you can see here is at max profit. We got in these...sold that one at 32 cents, bought the protection at 8. You can see right now it's at 8 cents. Well that will this rate, that will go to zero if we stay above $52.00. OK. Now as we get closer to the end of today, closer to the end of the week and bam, look at this.

The implied volatility which was at 150 percent now is know, it's pretty much gone, right. That's the implied volatility crush. And then for these further out of the money calls and puts that we sold, then I could buy these back at a nickel but the $75 call, I'm just going to kind of sit on that and see if that will expire. My bet would be, oh, I don't think we're going to rally that far, right. OK. So now, let's go ahead -- I'm going to actually buy this one back too. We got nice profits there. I don't want to dump in all that risk.

Then from here you can actually then, the next part of this is step up and say, the implied volatility has collapsed, there's obviously some action going on here. And so what we could do is we could buy an at the money or a near money strangle. OK. So if we go -- we're at 64 bucks. If we bought the 62, 63s -- and I like to go slightly in the money. So we could buy -- well the at the money's here are like right at a dollar. So we could say, all right I'm going to buy the 63 calls, OK, on this side. So you've got some in the money action. And then -- well actually 64 is fine too...63 and a half. So the idea with this is that in terms of doing a strangle here OK, or a straddle going long, is that you're looking for a stock that generally they're going to open up kind of quiet like this, and then at some point having a pretty decent move, either up or down. OK. And it's not presuming...nice day. That's the way to do it, and you can go further out as well. All right. So anyway, hopefully that helps.

Let's look real quick at the other ones. So IBM earnings play, pretty decent. Now this one actually came down pretty good. We're actually not in too much danger here. The 175 put that we sold is the only one that's really in any danger at all. But you can see that that one's cruising along pretty good. Coach was the other one that opened up pretty low. But it's down 4 bucks. That was the expected move. So our $47 puts, they're in a little bit of danger but look at this. We gapped down 4 dollars. OK. We gapped down 4 dollars and we doubled our money. That's called implied volatility crush. So we can just look at getting out of those.

Then Texas Instruments was the other one. OK. On that one I sold my stock. So on that one I bought the stock after hours. We flipped it out. That target got hit. And so that was good to go there. So that was it, right...Texas Instruments, IBM, and CREE, OK. So anyway, I'll conclude the video here and we'll go on with the class but that's kind of an earnings plays that we did in earnings class and we'll continue doing those tonight in the room and on Netflix and the stocks that has earnings coming out tomorrow.