Two of our open straddle positions launched higher yesterday after reporting earnings. They were Carvana Co. (CVNA) and Twilio, Inc. (TWLO). The CVNA options that we are holding don’t expire until January. We want to continue to hold those ‘as is’ because adjusting the position would be expensive. TWLO options expire on the 15th of this month. An adjustment to our TWLO position allows us to lock in a nice profit and remain in the trade to potentially profit from the big events we have coming up next week (the election and the Fed meeting).

In the time series chart below, you can see how the stock price gapped up and the 1-month implied volatility (the lower green line) got crushed. In our coaching sessions, we’ve taught the principle of letting your profits run. We allow ourselves to take some profits when the stock price gets outside of the probability cone. Yesterday’s jump on earnings put us in a position to lock in some profits on TWLO. We’re not exiting the position. We are simply making and adjustment that completely removes our risk and allows us to let our profits run as far as possible until November 15th.

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This Volatility Term Structure  chart for TWLO shows us the implied volatility for the at-the-money options for each expiration. You can see the shortest term has the highest implied volatility. The implied volatility of the November 15th expiration is at 36.38. Yesterday, before the earnings report the implied volatility for the November 15th options was 63.92. Volatility expectations were nearly cut in half. This makes the cost of our profit taking adjustment cheaper and allows us to take a greater profit off the table.

This MDM graph  compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of TWLO’s share prices over the past 2 years (the blue histogram). You can see that the behavior of the stock over the last 2 years shows it tends to make bigger moves than November 15th options prices expect. This tells us that TWLO still has room to keep moving. With big events scheduled next week, each one with the potential to be a catalyst for more big moves that could propel our position deeper into profitable territory, we do not want to exit our trade completely.

TWLO made a huge gap move yesterday after reporting earnings. Our open position is so profitable, we can take some profits off the table and lock in a huge gain while remaining in the trade that can continue to profit if TWLO continues higher or if the stock gets hammered after next weeks big events.

To get the specific details and prices on today’s trade adjustment, be sure to read today’s ODDS Online Daily Option Trade Idea.  

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback