Updated: Aug 24
Today I am going to talk about an option strategy I did on the Boeing Company (BA) on Monday the 3rd of July 2023. On this trade I made almost 33% profit in 25 days.
Let me explain why I got into this trade in the first place. In June, by looking at the chart of the Fear and Greed Index (VIX) I noticed a decline in volatility (IV) in the overall market. Implied volatility is one of the main components of the options pricing and this reduction in the value of IV could make it convenient to purchase options premium at a cheaper price.
With this in mind, I went on analyzing different underlying to try to find one that could be feasible for a good trade. By looking at the Boeing Company (BA) two pieces of information got my attention: 1. The implied volatility of the stock was extremely low; 2. A significant earnings release for the company was due in just 23 days.
Benefit from the Quarterly Earnings Announcement
Now this may tell you nothing, but the quarterly earnings releases are one of those events which can trigger a substantial move of a stock in any direction and determine a big rise in implied volatility. This translates in a much higher value of the options premium. If you are able to anticipate this move, you can purchase options when their price is relatively low and then sell them back after the rise in volatility has increased their value. On top of that, you need to add the possible sharp move of the stock which can impact further on the value of the options traded.
All of this considered, I saw a great opportunity to open a delta neutral trade such as a Long Straddle options strategy. My goal was to benefit from a likely rise in implied volatility and/or a significant change in the price of the stock in any direction triggered by the upcoming earnings release.
On Monday the 3rd of July I purchased 1 contract of the $210 call option expiring on the 17th of November 2023 and 1 contract of the $210 put option expiring on the 17th of November 2023. This simultaneous purchase created a delta neutral strategy with an investment of $3028 and unlimited profit potential where I expected a sharp move of the underlying regardless of its direction. In fact, with this strategy you seek an increase in implied volatility and ideally this has to happen in a reasonable amount of time.
The Vega and the Theta on a Long Straddle
The other interesting metrics on this trade are the Vega and the Theta. A Long Straddle is a Vega positive trade where the position benefits from an increase in implied volatility. In this specific case the Vega is a booming +$100.67 meaning that for every 1-point rise in the implied volatility of the two options purchased, the Straddle will increase in value of $100.67. Conversely, a 1-point decline in the implied volatility will decrease the Straddle by the same amount.
It is key in this strategy that you purchase relatively under-priced options with IV likely to increase to avoid a possible negative impact on your position. In this specific trade I did not see any major risks as I was confident that IV was likely to rise going towards a much-anticipated earnings release.
A Long Straddle options strategy is a Theta negative trade where the passage of time hurts the position. Here the Theta is -$10.71 meaning that every day that passes by the position loses $10.71 in value. As a result, a Long Straddle is not a trade you want to hold for long to avoid the negative effect of time decay.
In the following days, I had to monitor the trade just a few minutes a day. I was looking closely at the price action of the underlying and the implied volatility values as the stock was moving towards the anticipated earnings release. On Friday the 28th of July 2023, with the underlying security moving upwards almost 12% following the earnings announcement, I decided to sell back the options purchased and close the Straddle with $1000 profit and 33% return on the funds invested.
Hope you enjoyed this strategy!
I’ll see you in the next release of the options trading diary.