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Two Earnings Plays for Tomorrow...

We're officially in earnings season and here are two opportunities that stick out to me for tomorrow...

Both of these names are large caps so I don't like super aggressive strategies like ratio backspreads.

  1. Bearish Biogen (BIIB):
    • Long 41 shares at $265.81
    • Long 1 November $265 put at $14.90
    • Long 1 November $255 put at $10.60
    • Long 1 November $245 put at $7.20
Anytime you're trading options with elevated levels of implied volatility it will be difficult to get a lot of convexity and this trade maxes out at 5.72x with a 23% move.  However, the structure manages to get the downside breakeven price up to about $240 which is only about 2.5 ATRs away.  The expected value on this trade is anywhere between $600 and $1,000 using projected vol and $1,400 to $2,100 using implied vol.


      2. Long Vol Kinder Morgan (KMI):
    • Short shares 290 at $31.88
    • Long 6 November $32 calls at $0.78
There's something very interesting going on with Kinder Morgan options ahead of tomorrow's earnings report.  The put options are reflecting the typical spike in implied vol (the November ATM put has an implied vol of 36% vs. a projected period vol of roughly 21%) but the call options are showing as being insanely cheap (the November ATM call has an implied vol of 21.5%).  Put/call parity is supposed to prevent this type of pricing anomaly from arising but for whatever reason it doesn't seem to hold here.  This position has a straddle type of payout structure (straddles are usually a terrible trading strategy) but the breakeven prices are only 1.7x ATR on either side of the current price.  Even if the company reports bad earnings, a layoff announcement (which is expected) could prompt a recovery rally and those cheap call options could really pay off.

Here's what the payoff vs. price projection looks like:

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