Pre-Market Strangle With A Twist

While the American humans use this week to elect the lesser of two evils, I will use this opportunity to strangle NVDA for the last time this year.  Since NVDA is announcing earnings on November 8th after the market closes, I'll use this opportunity buy the November 13 calls and also buy the November 12 puts using Fridays closing price for each at around .35. That's $35 for each option contract because each contract represents 100 shares ( .35 x 100 shares = $35).  I'll sell these just before the close on November 8th.

 

I do not want hold these through earnings.  The idea is to let increasing volatility and/or price swing in either direction produce an increase in the price of the options.  Holding through earnings may seem like a good idea because drastic price swings can occur after earnings but just as there can be a volatility rush before earnings, there is often a volatility crush after earnings so the gain achieved through a large price swing can be wiped out by the decreased volatility after the announcement. 

 

In this case I am holding the options for no more than four or five days so theta or the rate of decline in the value of an option due to the passage of time is limited.  There nothing worse than buying something that declines in price the minute you buy it...like..umm...everything, except gold maybe.

 Here's a good reason to use NVDA for a strangle...

 

 

Those spikes represent the increased implied volatility, and then the decrease in volatility after earning announcement.

 You can refer back to the last NVDA strangle (which resulted in a five-day 70% gain) here for the set-up and here for the result.  I don't expect those kind of stellar gains but with the added twist of an election on Tuesday who knows what direction stocks will go.  And who cares about direction when you are in a strangle.  We just want something to happen.  So a Romney boost, or an Obama dive, or a market up-turn due to removing election uncertainty will help our cause.  Of course if volatility drops after the election and prices flat-line we will get nada or maybe a small loss. 

 

 Strangles used in this manner are low risk, low reward usually.  So while waiting to see if the self-serving politicians you voted for will win, a strong market reaction to the election could put this strangle in the money.