It's August options expiry tomorrow, which means traders are looking for massively low risk options to sell for a nickel or a dime. But consider two option trades that might prove to be more profitable with just a little more risk.
Tesla Motors [TSLA:NDQ] can be considered a volatile stock. Just like any other stocks, it has its good and bad days, but its option premiums are pricing some sort of event that shouldn't be existing in the next 29 hours. The company's earnings were two weeks ago and showed growing revenue. With that in mind, take a look at a short straddle trade at 24.
The shares are trading at slightly above $24.00 at the moment, and the call and put options are bidding $0.40 and $0.50. The spreads are ridiculously large, so you might be able to earn an extra dime on each leg too, but low volume on the options might mean a lack of a fill on the sell and the buy back tomorrow, so trade wisely. Anyways, you would earn $0.90 minus Tesla's deviation away from $24 tomorrow. That is, if Tesla trades at $23.50 tomorrow, you would earn $0.40 per contract or 1.67 per cent in a day. This trade requires you to close out at least one side, but the closer to $24, the better.
A second trade consideration would be to play Hewlett-Packard [HPQ:NYSE] earnings. The company reports earnings after market close today and is expected to report $1.05 per share. Writing options on earnings historically is a very profitable thing to do, as buyers bid up option premiums in anticipation of a heavy move up or down.
If you're looking to do a short strangle or combination, try to cover yourself from a 7.5 per cent move. I have found that to be the safe area since many blue chips do not often move that much after earnings. With that strategy, you would be looking at the 33 call and 28 put. Both options are bidding about $0.39. The stock sits right in the middle at $30.50. As long as the shares move less than 8.1 per cent, you would not have to buy anything back. However, one warning is that HP's last two quarterly earnings have seen the shares move well over 10 per cent overnight, so it is up to you to decide if another big move is in the works this earnings play.
Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are transactions that may be or have been placed in my account and should not be taken as professional advice. I own shares of Tesla Motors.
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