I have this pact with a trading buddy - we both agreed to steer clear of trading a stock just before earnings. But guess what? Sometimes, the problem of low IVR and tempting volatility leads us to "bend" our rules a bit.
Walgreens caught my eye, they reported on a Friday so with 1 DTE (days to expiration) I could sell the 30 put for almost .30 cents (a cool 1% return overnight). As I looked at their past results they had a track record of consistently meeting\beating earnings since 2020. Sure, we know past performance isn't a crystal ball, but it played a part in my decision-making process. I ended up selling some 30 strike puts right before closing on Thursday, securing .29 premium. (My buddy always seems to one-up me on these fills, but that's a tale for another time! I think he got .33 credits)
You probably already know where this is going since I'm writing a blog post... Walgreens missed earnings for the first time in years! I woke up to a gap down, with my puts suddenly ITM (in the money). I was losing and losing bad. I think the .30 credit would have taken almost $2 to close (so that means a loss of $170 per put I sold if I closed it that day).
I knew before hand that gapping down was POSSIBLE so I didn't sell all the buying power I planned on putting into this stock before the earnings event. I planned to add another equal amount of puts on a gap down. To me this isn't doubling down so much, it's more so only putting on half my risk in the initial trade!
Here's what I did (and this is all in our free GKT discord in real time): I stuck to my plan. I sold an equal number of puts at the 27.50 strike for another .30 for July 21 (35 DTE). Here's a picture of the chart, the two red lines show where my puts where.
So you can see my 30 puts were underwater and they expired on this day. The 27.50 puts were not super profitable but they were green! This candle is called a DOJI and it means there is indecision!
On this day (0 DTE) I rolled my June 30th calls by buying back the puts for 1.89 and sold the Jul 21 30 puts for 1.97, netting a .10 credit.
And then, I waited. I just had to trust my plan that Walgreens was not going bankrupt, not going to zero. It is possible they could have, but it's a pretty low probability. As you can see the stock recovered!
By July 3rd, my 27.50 puts closed for .15. (so that was $15 per contract).
By July 11th, my 30 puts closed for .20 (so that was $20 per contract). In the end, it turned out to be a ok win, considering I was down by over $150 per put at one point.
So what are the takeaways here?
1. Past performance doesn't mean anything for future performance.
2. Stick to your trading plan and don't let emotions cloud your judgement.
3. Have a plan no matter what the stock does. Know what you are going to do if it goes up, down or sideways BEFORE you take a trade.
4. Do not let the P/L of an option scare you into closing it at the worst time!
5. Consider lowering your risk before a binary event like earnings. Put on only 1/2 the trade size. Or, Don't take undefined risks before earnings (even if your trading buddy encourages you to!)
Even if I'd ended up with Walgreens shares, I knew I could sell premium against the shares. I had a plan. This experience is a classic example of why we make plans and also why we sometimes break them. It demonstrates the value of understanding risk and reward, time horizons, and why taking pre-earnings trades is usually not our thing. But most importantly, it highlights why, at #GoodKidsTrading, we always stress the importance of trading with discipline and focus, regardless of how the market behaves.
Want to join us on this journey? Head to goodkidstrading.com and join our free discord. Let's grow together, learning from each win and every misstep. Happy trading, good kids!