The savvy trader: Exploring 3 options strategies for Adobe's earnings volatility crunch

Expected move: $45 range

Analysis of the 13-Dec-2024 options chain (see screenshot below) indicates a market-implied move of approximately ±$45 based on the at-the-money (ATM) straddle pricing. This translates to an expected price range of $505 to $595 around the current stock price of $550. The strategies discussed below incorporate this range as a key factor in their construction.

Important note: The expected move is a calculated indication based on current option prices. Actual price movements can exceed this range, especially if earnings results significantly surprise the market. It serves as a guideline for structuring options trades.

Strategy 1: bull put spread

The bull put spread is a directional options strategy that anticipates upward price movement or stability within a specified range. It also benefits from a decline in IV post-earnings.

Structure:

• Sell the 560 put
• Buy the 540 put
• Expiration: 13-Dec-2024

This setup generates a net credit, providing a potential profit if the stock price remains at or above $560 by expiration.

Key characteristics:

1. Simulation insights:
• In the OptionStrat calculator simulation (see screenshot above), the upper strategy window shows how the position might perform on Thursday, the day after the earnings release, accounting for the expected IV drop and stock price movement.
• The lower strategy window displays the P&L graph at expiration, showing the maximum profit and loss potential based on where the stock settles by the 13-Dec-2024 expiration.
2. Potential outcomes:
• If the stock price rises toward the upper boundary of the expected range (approximately $590), the spread can achieve near-maximum profit due to price movement and the IV crush.
• If the stock remains near the current price, the IV drop alone may still result in a profitable outcome, although less pronounced than with upward movement.
• If the stock price declines significantly below $560, the strategy incurs a loss, with maximum loss occurring if the stock moves below $540.
3. Risk-defined:
• This strategy has a maximum loss of $942, which occurs if the stock falls below $540 at expiration.
4. Probability of profit (POP):
• Approximately 54%, reflecting the balance between potential profit and loss.

Key metrics:

• Net credit: $1,058
• Max profit: $1,058
• Max loss: $942
• Break-even: $549.42

Strategy 2: iron condor

The iron condor is a non-directional options strategy that aims to profit from price stability within a defined range, taking advantage of elevated IV and the subsequent volatility collapse.

Structure:

• Sell the 505 put
• Buy the 495 put
• Sell the 595 call
• Buy the 605 call
• Expiration: 13-Dec-2024

This strategy generates a net credit, with maximum profit achieved if the stock remains between the short strikes of $505 and $595.

Key characteristics:

1. Simulation insights:
• In the OptionStrat calculator simulation (see screenshot above), the upper strategy window shows the projected position performance on Thursday, the day after the earnings release, incorporating the anticipated IV crush and limited price movement.
• The lower strategy window displays the P&L graph at expiration, reflecting the maximum profit or loss based on the stock’s final position by the 13-Dec-2024 expiration.
2. Potential outcomes:
• Maximum profit occurs if the stock stays within the range of $505 to $595, as both the put and call spreads expire worthless.
• If the stock breaks out of this range, partial losses occur, with maximum loss realized if the stock falls below $495 or rises above $605.
3. Volatility consideration:
• The strategy benefits from the anticipated IV crush post-earnings, which reduces premiums for the short strikes.
4. Risk-defined:
• The strategy limits losses through the purchase of protective options on both sides, with a maximum loss of $622.

Key metrics:

• Net credit: $378
• Max profit: $378
• Max loss: $622
• Break-even points:
• Lower break-even: $501.22
• Upper break-even: $598.78

Strategy 3: bear call spread

The bear call spread is a directional strategy designed to capitalize on potential downward movement or stability below a specified price level.

Structure:

• Sell the 520 call
• Buy the 560 call
• Expiration: 13-Dec-2024

This setup generates a net credit, with maximum profit occurring if the stock price remains below $520 at expiration.

Key characteristics:

1. Simulation insights:
• In the OptionStrat calculator simulation (see screenshot above), the upper strategy window illustrates the position performance on Thursday, the day after the earnings release, based on the expected IV crush and price behavior.
• The lower strategy window displays the P&L graph at expiration, showing the profit or loss potential depending on the stock’s final price at the 13-Dec-2024 expiration.
2. Potential outcomes:
• If the stock moves downward or remains below $520, the strategy achieves maximum profit as the short and long calls expire worthless.
• If the stock price stagnates near the current price, the IV crush may offset some premium decay, but the call skew may still result in a breakeven or minor loss.
• If the stock rises significantly above $520, the strategy incurs losses, with maximum loss realized if the stock exceeds $560.
3. Risk-defined:
• This strategy has a maximum loss of $1,860, occurring if the stock price moves above $560 by expiration.
4. Probability of profit (POP):
• Approximately 29%, reflecting the impact of call skew and the proximity of the short call to the current stock price.

Key metrics:

• Net credit: $2,140
• Max profit: $2,140
• Max loss: $1,860
• Break-even: $540.43

Conclusion: risk and responsibility in pre-earnings trading

Pre-earnings options strategies offer opportunities to engage with elevated implied volatility and the anticipated post-earnings IV crush. Each strategy discussed here is risk-defined, meaning there is a maximum potential loss, which must be understood and accepted before entering any position. Markets are inherently uncertain, and unexpected outcomes are always possible, particularly during earnings events.

These strategies are presented for educational purposes and are not tailored recommendations. Anyone considering these approaches should conduct thorough due diligence to ensure alignment with their own market outlook and risk tolerance. Multi-leg strategies like these can be complex and may not be suitable for all market participants, particularly beginners. It is essential to approach these trades with a clear understanding of their structure, risks, and potential outcomes.

Happy trading!