$DECK Earnings trade with IMTF™with 3:1 Reward/Risk. One of the strategies we like to implement is a pre-earnings trade. For the pre-earnings strategy, we have two sub-strategies. One is where we look couple of weeks before the earning announcement and the second is day before. Both strategies are taught in great detail in our Option University.
$DECK was done today before market close. The earnings announcement was after market hours. If you know what you are doing, you can get a very good reward/risk in a short amount of time.
Let’s discuss the $DECK bearish trade we took today. Below is the weekly chart. The weekly time frame shows price is consolidating changing sentiment over and over. There is a major resistance at 58.82. This resistance came again in the form of a cross right before earnings. This was the sign we were looking for to execute a trade for pre-earnings. We never got it a couple of weeks ago.
With the cross resistance, we looked at options for a bearish trade. After evaluating the option “Greeks”, it was seen that volatility was high. As a result, we could not look at buying a straight put. We needed to look at buying vertical spread.
Below is the vertical spread that was executed. This is the risk graph for one contract. The risk graph shows risking $60 to make $187 for one contract. This met the requirement of 3:1 that we look for in spreads. I understand most people look for around 8% of profit in spreads but that is not good money management! You need your winners to take care of all your losers and still be profitable. That can only happen if you have a 3:1 reward/risk which is 300%.
We choose March options for the trade since both the Weekly and Monthly are bearish. Sometimes with earnings, you get a “slow” movement. Therefore, we didn’t want to get caught up in that situation. 46.25 is the next major support (past black crosses). Pivot low was 41.00. With this in mind, we choose the 47.50/50 spread. As long as the stock was below 47.50 at March expiration, we would get max profit. This met the technical requirement.
The trade fit our money management and technical requirement so we executed the trade.
After hours, earnings was bad and the stock is trading at 42.38×42.57 in after hours market. We have to see what price will open at market open. Remember, things can change between after hours and market open.
Right now, it looks good but you never know. Always be prepared for the worse so you don’t get caught off guard and make mistakes.
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