SanDisk Corp is scheduled to report earnings 4/21/10 (AMC).
I want to get short May IV. According to the LiveVol Pro chart seen below the front month straddle has lost value four of the past six earnings releases. Additionally, the stock price has gapped down after earnings four of the past six releases.
My thought process here is that I want to be short Vega and short Delta. (SNDK is now down 4.7% and the NDX is down and I’m currently bearish in general.)
I decided to model an unbalanced short straddle with more short calls than puts. I looked at a 2:1 short $36 ATM straddle. Then I decided to buy some ‘wings’ for protection. The ATM short $36 straddle is predicting a move of $4.60. SNDK is currently trading at $35.93, so the move predicted is between $31.33 and $40.53. I decide to buy the wings at the $32 put strike and $40 call strike. So, the trade is: all May expiry, –20 $36 calls, –10 $36 puts, +20 $40 calls, +10 32 puts.
I like naming my trades, so I think is can be called an ‘unbalanced iron butterfly’?
The Thinkorswim P&L chart looks like this below:
After earnings IV should crush for all the options. The trade is profitable under $38.10 (+ 6.04%) which is my upside mental breakeven, but a gap above here is very possible with good news. Max loss is $3780 but with almost a whole month to go after earnings there’s little to no chance of that happening.
Above is the LiveVol Pro chart of Implied Volatility. Notice the run up into earnings last quarter and again this quarter. Last quarter IV fell from 60.9% to 50.6% or around 10%. I modeled our trade with a drop in IV by 10% as seen below:
You can see how a one day drop in IV by 10% brings the white line up into the profit zone without the underlying moving at all in the below chart.
I’ll provide updates on this trade going forward. If SNDK has a big move down tomorrow prior to earnings I’ll take a partial profit, otherwise I’ll hold the whole thing into earnings after market on Wednesday…
*this is not a trade recommendation.