Thursday, March 12, 2009

ARO Short Straddle

Aeropostale (ARO) is reporting earnings Thursday after the bell and has been uptrending nicely the last several weeks. The stock is right around that 25 mark. The implied volatility is int he mid 70s while the stock volatility is much lower around the 40 area. Looking at previous earnings reactions it has moved less than 10% 4 out of the last 5 times. Usually when I play earnings I sell option premium. For example, selling credit spreads or straddles/strangles. With the stock around 25 I think this is a nice time to sell a straddle in March. You do not need to hold into expiration if you get a nice gain overnight on this trade.

Sell the March 25 straddle for 2.45.

In this trade you selling short both the 25 put and call in hopes that that stock stays as close to 25 as possible.

Your max loss is umlimited beyond your breakeven at expiration which is 27.45 on the upside and 22.55 on the downside.

Max gain is the credit you take in initially if ARO finishes next week at 25.


Spencer said...

Nice call on this earnings play. There would have been a way to play this without the unlimited loss risk right?

Jason said...

Of course. But instead of having a directional bias on the stock, I didn't so I went with the neutral play.