Options Trading: Get PEPE With This Tech Trade

| April 25, 2018 | 0 Comments

options tradingThe 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.

Skyworks Solutions

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.

SWKS volatility chart

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

SWKS Order Entry Ticket

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.

 

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Category: Options Trading Strategy

About the Author (Author Profile)

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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