CRAB trades can be an efficient trading strategy for earnings, especially for those who are new to trading. This strategy involves using options with different expiration dates to take advantage of the increased implied volatility in the near-term options. By placing a short option with a near-term expiration and a long option with a further-out expiration, traders can reduce the cost of the trade while still having the potential for profit if the stock price moves.
The key to this strategy is capitalizing on the high extrinsic value in the near-term options and taking advantage of the volatility contraction that happens after the earnings announcement. This can lead to larger gains even with a small directional move in the stock price. For example, by selling options with a 20-ish delta and buying options with a 40 delta further out in time, traders can achieve a flat delta position. As the shorter options expire throughout the week, the position quickly transitions to a 40 or 50 delta long option.
This strategy is considered high upside with relatively low risk, as long as the directional move is correct. The speakers in the video also believe that this strategy is here to stay and can be used continuously because it incorporates a short vol (volatility) component. They believe this strategy is particularly useful for earnings trades because it defines risk and offers multiple potential outcomes, even if the trade is not immediately successful. By using this strategy, traders have more flexibility and can roll into an earnings cycle, which provides more options compared to selling undefined risk.
The speakers in the video also briefly discuss recent trades they have made, such as a put spread on KRE (a stock symbol). They mention the potential for closing out the position or adjusting it to reduce risk. They have used iron condors or other strategies in the past to fund directional trades, but they note that it depends on the size of the account and available capital.
In terms of buying power efficiency, the speakers recommend looking at the maximum profit relative to risk. They mention a trade that yielded a 10% return on capital and suggest aiming for a 20% return on capital when selling premium. They also note that trading higher implied volatility products can help achieve a higher return on capital.
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