Strangle / Stradd;e with Collar - Part II - NVDA and RIMM

This is a continuation of the post on Straddle / Strangle - from a "vegas" to a high probability "safe" trade.

I did 2 more trades - NVDA and RIMM.  Both were pending earnings results. NVDA has announced and RIMM will announcing on 3/24 after market closes.

Keep in mind this is a high capital, low return, short time frame and high probability trade. It is meant to be closed after the event.

As long as I reach my target of annualized return of more than 50%,  I may decide to close the trade.


1. NVDA

The trade was placed on 2/14 - 2 days before earnings.

I was debating on buying longer term put or a very short term put which expired in February 2 days after the earnings.

The problem with short term put is that the theta decay will instantly kill the trade without possibility of any adjustments. However, if the stock moves, it will probably yield better results because of the gamma or delta change.

There was a lot of excitement on NVDA. It was expected to move. It can be up or down. This is an ideal stock for such a trade.

Following was the Trade Structure opened on Feb 14th.


BTO 1000 stock  = 23.16
BTO 10 Feb 23 C   = 1.09
BTO 20 Feb 23 P  = .94.   ( Volatility is very high and option price was expensive )
STO  10 Jan 2012 25 SC = 3.5

Cost Basis = 26.1

Results were announced after market closed on Feb 16th. Pre-market shows that the price dropped slightly. There was not a lot of firework.

The market opened on Feb 17th with the stock dropping 2% in the first 15 minutes. My long puts and calls suffered high volatility crush.  Since the stock did  not move substantially, I was losing money. The first thing I did was to sell my puts and take the loss.

In about 2 hours, the stock price reversed and started to move up. The LC turned positive. The stock is making money. The trade turned profitable.

I had to decide whether to let the stock run or close the trade breaking even or enter a covered call.

The decided on a NTM covered call.

STC Feb 23 P  = 0.41
STC Feb 23 C = 2.46
BTC Jan 25 SC = 5.05
STO March 24 SC = 1.45

Cost = 23.42

The Stock closed on Friday at 25.63

The CC is ITM now. As long as it stays above 24, I will be profitable with a annual ROI of about 30%.

On hindsight, I closed the legs of the trade too early. I should have let it run. It closed the on Feb 17th with a 10% gain. The trade would have exceeded my objective of 50% Annual ROI.

2. RIMM

RIMM is expected to announce earnings on March 24th - one day before March option expiration.

Trade placed on Feb 14

BTO Stock = 66.3
BTO March 65 P =2.04
BTO March 67.5 C = 2.12
STO Jan 2012 72.5 SC = 6.7

Cost Basis = 65.8

I was planning to close the trade after earnings.

But RIMM prices shot up over the next 2 days. I reached my target objective. I closed the trade.

STC stock = 69.3
BTC Jan 2012 72.5 SC = 8.35
STC March 67.5 C = 3.6
STC March 65 P = 1.01

Cost = 66.57

Return = 2.28% in 2 days or about 60% ROI.

This is a case that I did not wait for earnings. I can always place another trade before earnings. I did that for FSLR by placing a trade after taking profit 2 days on the trade. Currently, I am waiting for movement as they will be announcing earning results this week. I will report the results

This trade strategy has been all profitable so far.. While waiting for the big move on the stock, the profit / loss did not fluctuate a lot. It was pretty neutral. Once there was movement on either side, it made money. In some of the instances, I decided to take profit first as long as the objective of 50% annual ROI is reached.