Tony and Katie got in and out of their AAPL earnings Call Ratio in under a day. Recapping the trade, the stock accommodated Katie and the covered the trade for a ~$80 dollar winner. Now, looking to redeploy the capital, the duo wants to stay neutral in Citigroup (C). Post-earnings, the stock still has a high IV Rank but has had a drop in price recently. Still, they decide to stay relatively neutral with a slightly bullish strangle, going tighter on the Put side. To finish off, T & K dig into GLD's custom trade, which has accommodated them since putting it on. Volatility has contracted and given Katie a winner. She has three options: hold the trade, close the long put spread and keep the Strangle to have more volatility contraction, or close out the whole trade.

Tony: Katie!
Katie: We're back.
Tony: We're back to cool.
Katie: Happy Wednesday.
Tony: How are you doing today?
Katie: Good.
Tony: Happy Wednesday, when I got in this morning I actually thought it was Thursday. Hate when that happens.
Katie: I know, that was me last week?
Tony: I don't know.
Katie: I wish it was Thursday.
Tony: I gained or lost a day depending on how you look at it.
Katie: I know, how are you this morning?
Tony: I'm doing well. Thank you very much for asking. How you doing?
Katie: Good, Personal Fast Market. Case and I have some things happening this evening that are, tying up the schedule a little bit.
Tony: Is tonight the night when you go to the …
Katie: Northwestern?
Tony: Northwestern University.
Katie: Yeah.
Tony: And present? Good for you that's awesome.
Katie: I'm excited, should be fun.
Tony: What time?
Katie: I should know this I'm speaking. Seven?
Tony: I used to travel I did 100 flights on Southwest Airlines alone, in one year and I fly multiple carriers. You really should know what time you're supposed to be there …
Katie: That's true.
Tony: It's prudent.
Katie: We're leaving here at five.
Tony: 5 o'clock.
Katie: I'll leave at …
Tony: I'll be honest with you. Jules asked me to come if I wanted to. Do you want me to go? I'll be happy to go.
Katie: Yeah! You're brilliant. You really light up the crowd. I was so …
Tony: I don't want to speak …
Katie: Astounded.
Tony: I don't want to talk, it's going to be your show. But do you want me to come? If you want me to come, I will come.
Katie: If you want.
Tony: Jules, can't ask me, you can ask me.
Katie: I know you have things to do, you've got obligations and such.
Tony: I know. If you want me to come, we'll take it offline then …
Katie: All right.
Tony: [crosstalk 00:01:23] Because I know we didn't discuss this. Let's take a look at your count real quick, had a nice earnings plan, Apple I really wanted to discuss that, you're up about 55 bucks today. You're up $1300 in your overall account, let's just beta weight you're account just to get that out of the way for a moment. While he's doing that, he just clicked on beta weighting. SPY it shows that you’re along 424 deltas, but when you can compare all the products you have. All the strategies, all the buying power, you compare that to SPY. You get flat. You're short 5 deltas, and you really have no outlying positions here, of all your positions there's really nothing I would say that needs to be looked at, at this moment.
Let's get out of beta weighting for a moment, and let's take a look at your Apple trade. To take a look at your Apple trade, I want to go into the … wherever we are the accounts statement tab.
He probably doesn't have that put up, while he's putting that up, Apple is trading … Oh, there you go. He got it. 116 and change, it opened a little over 117. We closed this trade when the stock was right around 116 and change, 116.19 or something like that. It's just the top two there … If you click on executed time, it should …
Katie: You want them at the bottom?
Tony: No, I want them at the top, [inaudible 00:02:47]. Oh, I'm sorry I was reading it bad, I'm so sorry.
Katie: I was like, "What are you talking about?"
Tony: My old eyes said 12-8-15, instead of 1-28-15.
Katie: Oh, got you.
Tony: I apologize, we're looking at the red one, the second one down, 5c credit. Then you buy it for a 72c credit that's a profit of 78c or $78 on one contract.
Katie: Right.
Tony: Not the point that I want to make, I'm glad we made money on the trade and everything else like that. Apple had a larger than expected move, look at the pricing on the 117 pricing call that you sold, 104. Look at the pricing on the 117 call that you bought after a $7 or $8 move in the stock.
Katie: Right, same thing.
Tony: It moved one penny.
Katie: Why's that?
Tony: This is why retail customers, do you know what the largest, not the largest option, but the one that most retail investors, option buyers buy when they're getting into trading? The option that's around $1, because it's a $100 worth of risk, I don't know why but the retail investor says, "I'm willing to risk $100."
Katie: Right.
Tony: They always pick the option that's trading for around $1, now that's not a queue on, “Hey, that's the option we should sell,” because it doesn't move that much. What I'm telling you is, this is not strategic. They're just looking at how much they lose opposed to how much they can make.
Here's a great example where stock moves even larger than it's supposed to move, and the option didn't move at all. That's all volatility contraction, make sense?
Katie: Yeah.
Tony: All right cool.
Katie: Good stuff.
Tony: New trade.
Katie: New trade.
Tony: Then, I want to take a look at, we already did Apple. I want to take a look at gold when we're done. Let's take a look, we have a couple of minutes. We have 10 minutes. Let's take a look, go into a chart of C. Citigroup.
Katie: Citigroup.
Tony: Right. How do you feel about Citigroup? Do you have any credit cards with Citigroup?
Katie: No, I don't have any credit cards at all. I probably should.
Tony: I'm on the fence on that whole thing. I've always paid cash, or at least tried to.
Katie: Same, that's how I am too. But I feel like I need to.
Tony: It depends on what you're going to do with the credit, and I guess you should establish some credit. I guess I'm speaking like a father now.
Katie: Well, it's not like I don't have any credit, but …
Tony: Credit cards can be very dangerous, interest rates are extremely high in them, you should look for a card. I guess it's just my own preferences that has no yearly pay. Forget about all the perks that they give you, they all give you everything now. Get the one with no yearly pay to it, and look for the one that has the lowest interest balance, but you really shouldn't keep any balance, so … I guess you should have …
Katie: I'm just saying I don't really have an opinion on Citigroup.
Tony: All right. Well, good. I'm glad you don't have any credit cards either. See, you're a keeper that's good. Every one of my children comes with a lot of debt, I'm going to ask their suitors for their…
Katie: Credit card?
Tony: No, they don't have any credit card debts, their university with their college expenses that I pay. Anyway stock $47. You know what? Make this a year chart, I want to engage maybe the technical traders out there. Make it a one year chart.
Okay, certainly you can say that over the last 10 days with the stock down about 4, almost 5%. 4.7%. You certainly could say the stock in the last month has been falling out of bed, you can certainly then say on the other side that this 46-47 area has been a place of support. Because if you go back a year, it's bounced off of 46-47 area for the last year. I'm not going to go into patterns or anything like that, because I don't know how to read patterns. I'm just going into price movement here. You've got a high IV rank of 55, you've had earnings come out, we're looking for March now, because 45 days is the optimal time, we have 51 days. Let's put on a slightly bullish.
To neutral type trade in Citigroup, selling volatilities since the IV rank is high. Make sense? Last time it had earnings, the earnings got up to 100% IV rank if you put a circle there in October. It got up to 100 IV rank and dropped down to, I'm sorry the time previous to that you've put another circle that's perfect. It dropped down to below 25%, almost down to around 5% IV rank, now we're at 55% so I'm looking at this as 50% to 75% higher than where it was last time it had earnings through the earning cycle. Let's go into dough and let's take a look at a strangle in Citigroup. Since we've taken profit it …
Katie: Apple.
Tony: In Apple we have a bunch of buying power, almost half of your buying power is sitting on the sidelines. We just took off XOP was another trade I wanted to take a look at for you, and gold was another one I wanted to take a look at for you if we have time we can do this. Let's go into C, let's go into strategies, let's go into strangles, change that expiration from 20 to 51 if you want.
If you have the weekly's out of there it doesn't matter if will pick up the one that's closest to 50 days.
Whatever you put in there. Standard deviation of 84, let's just make it 70 and we'll move it, because I'm going to skew the strikes a little bit. Dough is going to bring you an equal, or what feels an equal distance away to get that 70% probability of success once you take into consideration the credit received. I want to move the strike in, I want to keep the 50 call where it is. We like to get around $1 as a low end with 45 days to go, this is 51 days.
Katie: Of course.
Tony: I'm still going to keep that some $1. If we were one standard deviation away. I want to skew this a little bit, I know in … I get this confused all the time, FCX we just did a covered call. Cheaper price stock in the teens, we bought stock and sold …
Katie: 4 calls.
Tony: 4 calls. There are different ways, that one by four, it's not a classic covered call one by one, is really like a short strangle. You have risk above, much more risk than … Because you have three extra contracts. You have risk below one contract, because you're lower than 100 shares of stock.
Katie: Right, what we were saying yesterday off the show, is that it's kind of similar to a call ratio.
Tony: It's very similar to a call ratio, it's very similar to a strangle, they all have the same type of risk metrics to them. It's just a different way to skin the cat and some take advantage of more volatility contraction that the other. The one by four is going to take a lot more benefit from a lot more volatility contraction than the other. The one by four is will benefit a lot more from volatility contraction sooner, than say a ratio spread might. Does that make sense?
Katie: Sure.
Tony: So, let's move the 45, I don't want to do a covered call on here because we just did this yesterday. That would be on the cusp of doing a covered call, $45 stock, $47 stock, relatively inexpensive. Let's move that 45 put up to the 46 put, I'm just skewing it now ever so slightly, with the stock at 47 and a half, the first strike out of the money. Let's switch to the table view so everybody can see the pricing on the options too. It'll pick up what you have on there already. First strike out of the money you can certainly say is the 47 strike. If I wanted to collect a little bit more premium approximately 35, 37c more in premium I can go to the 47 strike.
Since I want to keep it and be a little bit more … I don't know, a little more …
Katie:
Tony: Not as aggressive? I have a hard time with that, not as aggressive, because if you're collecting more credit, yes more aggressive because you're collecting more credit, yeah. It might have a lower probability of profit, but you have more volatility contraction of volatile contraction. I don't know, there's an equilibrium here. I want to do here is, let's look at delta. You have a 30 delta on the 50 call. You have a 34 delta on the 46 call. The difference that I am seeing in here for me is, and you talk about skew. It certainly looks like there's put skew in Citigroup, as opposed to call skew.
Meaning that the put, that's not equal distance away but by its implied volatility is equal distance away, has a lot more premium in it than the call. Because they both have the same delta. Similar delta, make sense?
Katie: Yes.
Tony: All right, let's take advantage of that put skew, and sell the 46 put and the 50 call. Basically, a neutral spread …
Katie: [Crosstalk 00:11:25] volatility contraction.
Tony: Volatility contraction and a little bit of price movement too, right?
Katie: Yeah.
Tony: We need a little bit of a rally in there, make sense?
Katie: Sure.
Tony: Unless you want to go to 47, it doesn't matter to me.
Katie: I like 46.
Tony: let's do the 46, 50, go back to the curve view because it will show me the price, it shows you the price over there at 175 also, mid-price 175, 174, 173, 175, let's go in at 175. See what happens, we can always adjust it. Make sense?
Katie: Sure.
Tony: Awesome. Perfect. Go into GLD for just a moment, go into the trade page the monitor tab for just a moment, we've got about three minutes here. Close up Apple, open up GLD.
Okay, GLD we did a unique trade, it's a custom trade. We've done it before but not a lot. We had a view on GLD that GLD would go lower, we sold a call the 129 call, and the we bought a put spread. The 122, 119 and to finance buying that put spread we sold another 119 call. So I look at this as a strangle, the 119, 129. Plus a long put spread 122, 119.
We would benefit from the stock going lower, our downside risk is going to be a lot less than our upside risk, because our downside risk on this trade if it were to go to expiration, you would take the 1.19, 1.22 put spread which is $3 wide to get you to break even, which brings you down to 1.16. You break even on the upside, it's just going to be wrapped around that 1.29 area.
Katie: Yes.
Tony: Okay?
Katie: Correct.
Tony: All right, I want to show you something unique in GLD. Let's go to a chart in GLD for a moment. In GLD I'll need the monitor tab, not the monitor tab, the accounts statement tab when you're done with this. In GLD I believe we put this trade on the 20th?
Katie: Yes, the 20th.
Tony: Stretch it out a little bit, I mean highlight it, yes. Thank you.
Katie: January 20th for a $1.73.
Tony: Put your cursor over where the 20th is. It's going to be right where the stock is now, that green bar. Go up there, stop right there. We put this trade on, exactly where the stock is today, within 25 to 30c. We just put this trade on a couple of days ago, eight calendar days ago, you said the 20th correct?
Katie: Yep.
Tony: So sometime has gone by, but remember we're on a put spread, so you're getting that decay of the put spread, because we haven't moved. What has moved …
Katie: Is volatility.
Tony: Yeah, volatility has gone from around, what is that about 80%? 86% down to 51%. Go into the account statement tab, and because of that move, put in gold for me, because of that move a trade you put on for $1.73 is trading for, I think we're up at about $1.35. You can just go to the monitor, oh, yeah. Sure. If it will pop up there. It's trading for 34c credit, so to get the profit up on this trade you would take the $1.73, minus let's just say the 33c credit and you're up about $1.40 or 140 bucks.
Go back to the monitor tab, please. You're up $139. I was rounding, you're up $139 on this trade. My question to you is, since gold hasn't gone anywhere … I don't know if your opinions changed in the last eight days, you have a neutral position in your overall portfolio. Typically if the market would go higher gold won't be such a flight to quality. This should go lower; it's a little bit of a short delta play on the overall market and you have no delta play on the overall market.
Katie: Right.
Tony: Make sense?
Katie: Okay.
Tony: But you have a profit of almost $140 in here, how much do you expect to make on $2100 worth of risk. We typically would expect to make around $100 in risk. You're at your parameters of what you’re looking to make, you're at your time to take it off. We put this on only eight days ago. It's really a nice profit. You have to make the decision because we ran out of time whether look to close this trade, just sell the put spread. Highlight the selling the 1.22, just highlight those to, right click create closing order. You can sell this spread for around 87 to 89c, mid-price is 88c.Then you would have a classic strangle on. You'd have 88 or 89c worth of profit on, but you would still have risk. Does that make sense?
Katie: Yes.
Tony: You've got a lot of things you can do.
Katie: All right.
Tony: Leave it, take it completely …
Katie: Take a portion of it.
Tony: … off, book your $138 profit or something like that, or just get out of the put spread if you want to have a very, very neutral position. Got a lot of things to consider.
Katie: I'll be on dough.
Tony: Awesome. Everything that you do goes on dough, correct?
Katie: Of course.
Tony: The trade that you did this morning was on dough. The roll in the diamonds, that you rolled down in the diamonds …
Katie: Yeah.
Tony: … was in Dough.
Katie: Everything's there.
Tony: Fantastic.
Katie: Good show. Liz and Jenny are coming up next. Peace.
Tony: Good luck tonight, peace.