Lululemon Athletica Inc. (LULU) reported earnings after the markets closed on Wednesday. (LULU) is a great candidate to use the Double Neutral Calendar Spread strategy. To read more about this strategy, see this link here: http://kevinmobrien.com/?p=858
At the time of placement on Wednesday, (LULU) was trading at $66.50/share. Understanding past performance movement post-earnings on the stock, (LULU) tends to move in the $4.00 -$6.00 range, up or down after reporting earnings. When using this strategy, I like to go on the higher end of price movement. For example, at $66.50 a share, I was looking at the $72.50 strikes on the call side, and $61.50 on the put side. While there other closer near the money strikes available, using those presented too much risk for me, allowing less price movement in the share price to make a profit I was satisfied with.
Trade and Probability Calculator/P/L Chart
I got this trade filled at a $0.33 debit.
The following morning, (LULU) opened up at $73.35/share. This was a perfect scenario. Immediately at the open, the trade was very profitable. It could have been closed out then. However, an important factor with this strategy is that time-decay is on your side at this point. Depending on what kind of profit a trader is content with, a choice has to be made. I chose to keep the trade until this morning (Friday, 12/8/17). Understanding that the stock wasn’t going to make a drastic price move, time-decay taking place, I closed the position out at a $1.10 net credit on the call side, and also got $0.10 on the put side, which I sold on Thursday morning.
To compare strategies and costs, a Straddle strategy (buying both calls and puts that are at-the money), would have cost about $7.50. Using ten (10) contracts on each leg, this trade would have costs $7,500.00, minus commissions. A Strangle strategy would cost less, but there is also a lot more risk, as the stock has to move much more in order to profit.
Another benefit of the Double Neutral Calendar Spread strategy is how well it holds value. On a Straddle/Strangle, there must be a major price move in order to profit or you will be looking at a major loss. In my opinion, the Straddle is the most risky earnings strategy one can place. While the potential profit is unlimited on the upside (the calls), there is simply too much of a price move needed, often unrealistically.
When using this strategy, you want to see a profit/loss chart that looks like the one I posted above. If you see any points in the chart that look like this, avoid the trade completely:
You will always want to avoid non-volatile stocks that have a history of making minimal price moves post-earnings.
As I mentioned in my first post about this strategy, when used properly with the parameters I emphasize, this strategy is one of the most inexpensive, low risk, and profitable strategies there is when using for an earnings-based trade.
If you have any questions about this strategy, or stock options, please leave a comment or e-mail me at: firstname.lastname@example.org
This strategy, and all earnings traded are posted on my Trading Forum website, and each subscription has access to these trades (you receive them instantly via e-mail once posted). I am currently offering a subscription match plan until this Sunday, 12/10/17.