Options Trading: Get PEPE With This Tech Trade

The selling of decent reports continues to be a theme, and the whole market looks on shaky ground. Today’s options trading will try and sidestep these larger issues.

I’m going to establish a Pre-Earnings Premium Expansion, or PEPE, trade in Skyworks Solutions (SWKS).   

Skyworks develops semiconductor products that go into a wide variety of products from cell phones to wearables to medical devices.

The stock has already been suffering under heavy selling, and I expect the concerns to mount in coming days, manifesting in pumped-up option premiums.

Right now the May 4 options, which include the May 3 earnings event, carry a 55% implied volatility; I expect that to increase in coming days for three reasons.

• The whole semi sector is under pressure as many unknowns and concerns ranging from valuation, tariffs focused on tech intellectual property, and weak iPhone sales are creating flux.
• SWKS shares have moved an average 8% over the past 8 quarters; above the current 5% being priced in.
• The implied volatility of options usually escalates quickly into earnings. The chart below shows the ramp of the blended 30 day option the weeklies hit an average of 85% over the past 4 quarters.

Conclusion:  I expect IV to increase sharply in coming days. We are going to establish a double calendar to benefit from this expected increase.

The position may undergo some adjustments in the next few days (i.e. close one side, roll, etc) but will most likely be exited prior to the earnings event.

ACTION:

-Buy to open 4 contracts May (5/04) 86 Puts

-Sell to open 4 contracts April (4/27) 86 Puts

-Buy to open 4 contracts May (5/04) 91 Calls

-Sell to open 4 contracts April (4/27) 91 Calls

For a Net Debit of $3.35

This options trading will hold until next week, and I’ll exit prior to the 5/4 earnings.

I am targeting a 20% or greater return within that time frame.

Note: This article originally appeared at Option Sensei.

 

Tags: implied volatility, implied volatility of options, option, option premiums, options, PEPE, Pre-Earnings Premium Expansion, Skyworks Solutions, SWKS

Category: Options Trading Strategy