22 Jan 2022
earnings are this week for Tesla TSLA .... here is your thesis. you have either stock (in 100 share increments) or Long Leaps at lower strike than fridays close at 943 AND your expectation that the stock after earnings will get higher between 1000-1100 next friday.
one of my go to trades is the Call Ratio, also called a Catch-Up Trade.
Buy the Jan28 1000 call at $26ish
Sell 2 of the Jan28 1055 calls at $13ish each
with limit order id set a .10 credit to try to get a fill.
you do not need more buying power. break this down into pieces if youre new to ratio spreads.
you are buying the 1000/1055 spread and then selling an additional 1055 short call. its not by itself. if you have the stock then your broker pairs it to the stock and its a covered call.. if you have a long Leap your broker pairs that 1055 call to the leap and its a spread / diagonal spread.. so no added buying power is needed. if your Long Leap strike is higher than 943 you will need more buying power or your broker will not allow the trade.
so again its the Jan28 1000/1055 call ratio , profit range starts at 1000, is max at 1055 ($5500) then decreases to 1100... anywhere at opex 1000-1100 is profit. because you have 2 of the 1055s short , they will have to decay away to start showing profits, so initially the trade will likely show a mark to market loss...hold tight.. just expect to have to hold until friday at opex to see the best gains.
if stock closes below 1000 at opex then this trade just expires, no harm no foul.. just that couple cents from entry.. you could go 1000/1050 for example and it would be about a $2 credit ($200). the point isnt to get a big credit at entry, its for the multi thousand-dollar payoff if you get the direction correct. entering for credit is just gravy.. therefore, you can also go 1000/1100 strikes and PAY to enter this ratio.. your call, but i want zero downside risk.. free trade.
the only "loss" is if you undershoot the strikes and stock is above 1110 at opex.. but remember your long stock or Leaps have been gaining from 943 to above 1110 . so the ratio might technically be a loss but the "position" has gained.... there is a true breakeven where the loss from the ratio finally overtakes the gain from the stock but its 100's higher.. not really practical to worry about
the point here is to get that leverage to the upside.. to catch up from the losses from previous days.. the ratio profits, your underlying stock or leaps profit.
the part that i struggle with is comparing what could be from a ratio trade to what i might get with just outright short call sales. right now i could sell Jan28 1100 calls for $7+ credit. compare that to what i potentially could make on a ratio. the ratio would need to get to at least 1007 at opex to equal the short call sale... if its under 1000 i get nothing and i didnt get that $7 credit so i feel like i lost $7.. im usually a one-in-the-hand-vs-two-in-the-bush type of guy.
but if you magically get that 1055 pin youve made $5500.. historically ive waited too long to take profits on ratios trying to milk those last juicy profits if it was flirting with the midpoint for max gain as the short calls decay away and it end up surging / selling off into the close and i had to settle for a few hundred bucks to close the trade.. max profit at opex is $5500, if you can exit at $2500-$3500 you should probably cash out, pat yourself on the back, and move on to the next week for a new trade.. or at least cash out a portion if you have multiple lots.. in my case id cash out then sell a higher strike short call for the following week for more credit since thats my routine.
earnings are wednesday after close. it would be better if you wait till the day of to enter the ratio spread using the current stock price at the time since it might be up or down from today and the 1000/1055 strikes might not be appropriate on wednesday. you get the idea
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