By Andrew Giovinazzi
July 20, 2023
Yo Pit Crazies,
Microsoft Corp (Ticker: MSFT) went on a tear this week after announcing new pricing for AI related software. So, of course, the stock went up $20 in one day. The good thing was I was already positioned for it.
MSFT 5 Day chart with 1 min candles
I exited the trade after the first rip on Tuesday, made $200 on a one lot, and watched it go up $700 about an hour later. Good problems to have. The bigger questions is what was the trade, why did I put it on, and how did I know something was going to happen?
The Strangle Straddle Swap
This type of trade used to be popular in the Pro Room when stocks moved around earnings. Post-covid era trading pushed a lot of the tails – the out of the money calls and puts – to more expensive prices, so this trade setup was cost prohibitive.
Breaking the trade down, it’s nothing more than a short straddle 1 time, fenced in by 3 strangles. Essentially, it’s an iron butterfly with 2 extra strangles on top.
I used to trade them through earnings, looking for a stick at the strike on an earnings fail where the stock doesn’t move, or an outlier move where the stock really jumps or crashes.
They do have bad areas where the trades can lose a decent amount of money if the stock pins near a long strangle strike.
The net debit on this trade was around $2.00, with $2000 in credit margin from the iron butterfly. Remember, if MSFT doesn’t move, the trade doesn’t cost anything, but if it moves big, I get a nice payday.
MSFT is one of the Rift stocks going into the Invesco QQQ Trust (Ticker: QQQ) rebalance, so I figured it had a chance to move early. My thought was that it would be down, but the market thought otherwise so far this week.
I have trades like this in the past, where I sell the straddle in the very close to earnings cycle, and buy the strangle in the next week. I changed it up on this one because I didn’t want to deal with the difference in terms this time. The 3 to 1 ratio in the Aug04 cycle was very nice from a cost point of view, since the straddle mostly paid for the 3x strangle.
Learn to make the market do what you want.
For a full video breakdown of the Strangle Straddle Swap and other earnings plays, click here.
To Your Trading Success,
AG