Last Friday on Options Action, we did something we rarely do; we bought options instead of selling them. Our goal was simple, to try and give you new names and new strategies so you could get an edge on earnings. And while it remains to be seen whether we accomplished said goals, I thought a recap was in order nonetheless.
Dan Nathan came out of the bat first with Akamai . Over the last 8 quarters, the stock has moved an average of 15% on earnings. However, this quarter, options prices are suggesting a much more muted move, to the tune of 8.5%. Unsure of the direction but somewhat more convicted on the magnitude of the move, Dan recommended buying the November 44/50 strangle, purchasing both the 44-strike put and 50-strike call in the November Expiry for a total of $3.05. The trade pays off if (AKAM) closes either above $53.05 or below $40.95 by November expiration. Anything in between, and Dan will experience losses.
In our other trade, Mike Khouw and Carter Worth teamed up to frame a bearish trade on Chipotle , the high-end fast food giant for those with the most discerning palates when it comes to burritos. Khouw dipped into his bag of tricks and pulled out a weapon we rarely use in our arsenal: the put fly. There are two ways to think of this structure: buying one put spread and then selling another put spread, with the goal of having our stock trade to that short put strike. The other way, which may be more familiar to our viewers, would be to look at this structure as buying one ratio put spread, and hedging it by buying a lower strike put of the same expiration. Either way, it's pretty advanced swim stuff.
Specifically, Mike bought the March 185-strike put for $11.00. To offset that cost, he then sold two of the March 165-strike puts for a total of $11.00. Now Mike can profit below $185, but there's a tradeoff. He gets long at $165, and would see losses below $145. So protect himself against any losses, Mike then bought one March 155-strike put for $4 bucks. Excluding transaction costs, Mike can now profit below $181, all the way down to $0, and he doesn't have to worry about being put the stock since he is long that downside put.
Tune in next week.
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