Until Monday at least, the Covid stocks have been very hot. Companies like Zillow (Z) especially have been benefiting from the low-interest rate environment, says Danielle Shay of Simpler Trading.
In a broader sense outside of the direct market, you have people that are moving out of cities and want some more space. Additionally, there's been a huge surge in home sales and the real estate markets are really hot right now.
With all these factors in mind, I decided to do a bullish earnings trade on Zillow (Z).
Here’s how that played out…
I took the trade right before earnings came out with a simple overnight trade.
I went ahead and sold a put credit spread at the 100 and 98 strike prices. So, I was short the 100 put, and I was long the 98 put. This trade was set up to take advantage of high IV. What we commonly refer to as the IV Crush. It was also set up to take advantage of the theta decay that happens around earnings.
How did I know that high IV and theta decay would occur?
IV is a really important component as to how options are priced in general. Statistically going into an earnings report, IV climbs and climbs and climbs. That means the options are more expensive because the premium is juicier.
What that means is that typically even if the stock doesn’t move a lot, you can sell those options, then the next day after the earnings report comes out…the IV is crushed. The price of the options goes higher and higher into the earnings report, and then after the report is over there’s no major reason for there to be volatility. So, the IV is crushed and the options are worth less than they were the day before.
This is especially true if you, as the trader, gets the direction right.
So, since I sold a put credit spread at the 100-strike price, what was I looking to achieve?
I was betting on Z being above 100 the next day. What happened? Z gapped up and closed high the day of earnings about 104 or so. The next day it gapped up and traded all the way to 119.
What does that mean for profits?
So, the options that I sold, decayed in value. That’s a good thing when you’re selling something, you want it to decay in value. The 100 put I sold for 5.47 and then it ended up being worth 0.70. I did buy two 98 puts for protection at 4.52, and those went down to 0.60. Overall, it was a 100% profit, small overnight trade on earnings.
To learn more about Danielle Shay, visit SimplerTrading.com.
