A Big Money Cult Stock Straddle

Hey Traders,

With earnings season in full swing, there’s no doubt that some traders are already looking ahead to some of the “bigger” names that will be reporting in the next few weeks …

One Big Money trader in particular might be positioning him or herself to take advantage of some pre-earnings volatility … or a post-earnings price swing.

Here’s the $6,310,000 straddle play on a cult favorite.

Straddle Specifics

Before we get into the specifics of this Big Money trade, let’s take a minute to review exactly what a straddle is, and what it’s looking for.

A straddle involves purchasing both a call and a put with the same expiration date and same strike price on the same equity.

This is done when you think a stock is going to make a move …

But you don’t have a strong stance on the direction.

(On the flip side, a short straddle involves selling both the call and put, and is betting a stock is not going to move. In this case, a trader would be trying to take advantage of the sidewinding by collecting the premium.)

Straddles can profit from both a movement in the underlying stock, or from an increase in implied volatility (IV).

Because you purchased the call and put, if either the price of the underlying or implied volatility goes up, you can sell your options for more than you paid.

And at-the-money straddle prices can be used to estimate a stock’s post-earnings move.

You can read all about that right here. 

Now, onto the Big Money straddle we saw yesterday …

Cult Stock Straddle

Just a day after Apple (Ticker: AAPL) unveiled its newest gadgets — including more expensive AirPods to lose, a MacBook upgraded with the return of the HDMI port, and new HomePod mini colorways — one institutional investor (or more …) set their crosshairs on AAPL …

First, less than 20 minutes after trading started, one trader purchased 2,500 contracts of the November 145-strike calls for $5.17, while simultaneously purchasing the same number of November 145-strike puts for $2.97.

That’s a hefty $2,035,000 outlay, for those keeping track.

Just half an hour later, either the same trader came back and more-than-doubled-down with even more expensive AAPL options …

Or we’ve got a case of Big Money following Big Money!

This (second?) trader purchased the same November 145-strike straddle, but paid $5.85 for the calls, and $2.70 for the puts … and purchased a total of 5,000 contracts!

That’s a whopping $4,275,000 outlay …

And if these trades were both executed by the same trader, they spent a grand total of $6,310,000 on their straddle position.

And that wasn’t all …

About one minute after the second straddle went through, a block of 500,000 shares went up for $148.19 on the Chicago Stock Exchange, which specializes in putting up trades that correspond with big options trades.

Now, paying $8.14 per straddle indicates this trader is looking for quite the move out of AAPL … the shares would have to move up to $153.14 (about a 3% increase from their close at $148.76 on Tuesday) or all the way down to $136.85 (an 8% decrease from Thursday’s close) …

And the purchase of the shares makes me think they’re leaning towards the more bullish move.

Also consider AAPL’s mean move in the session after earnings over the last eight quarters is 3.4%. An 8% post-earnings drop would be an outlier. 

However, headed into earnings, I don’t think it is unlikely that they could be looking to take advantage of increasing IV.

Right now, implied volatility is rather cheap for AAPL, sitting in just the 14th percentile of its annual range.

As we head closer to AAPL’s earnings date … a sharp increase in IV isn’t guaranteed, but it isn’t unlikely, either. Take a look at the two-year AAPL chart, with 30-day implied volatility on the bottom.

Earnings are marked with the “E.”

You can see that while IV doesn’t ALWAYS rise dramatically ahead of every earnings report, it often does.

If AAPL IV begins to rise over the next week, I would keep an eye out for this trader to start taking profits on some of this position.

Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.