Salesforce (CRM) and Beyond Meat (BYND) are two of the companies set to report earnings Thursday after the close.
- Salesforce options are pricing about a 5% move
- Salesforce was lower by -9% on its most recent earnings report and saw moves of +26% and -3% in the two prior.
- Beyond Meat options are pricing about a 9% move
- Beyond Meat was lower by -17% on its most recent earnings report and saw moves of -7% and +26% in the two prior.
Salesforce: Using the Expected Move to Help Create Options Spreads
Using Salesforce and Beyond Meat as examples, we can see how the expected move might be used to help guide strike selection on options spreads, both debit, and credit. We can also see how option spreads can be used to reduce capital outlay and potentially improve probability of profits (versus buying outright calls or puts).
With CRM trading near $237 we can use the 5% expected move (about $11 in the stock) to generate spreads, both debit and credit, and compare those to outright calls. Here’s an example of spreads based on the expected move, with a bullish view, via Options AI:
We see two credit spreads, and one debit spread. We’ll focus first on the Feb 26th +237.50/-247.50 Debit Call Spread. This spread is trading at approximately $3.50. Here’s how that trade looks on the Options AI chart:
It buys a 237.50 call and sells a 247.50 call, creating a breakeven of about $241 in the stock (the trade profits above that level at expiry).
With this Debit Call Spread a trader is able to position for a move higher at a cost of about $3.50. That is less than the cost of most outright calls near the money and is not much more expensive than the out of the money 247.50 call itself (currently about $3).
Bearish – The same process can be applied to Bearish Debit Spreads, with the CRM +237.50p/-227.50p debit put spread trading at a similar cost:
Next, we’ll focus on one of the two credit spreads from the strategy comparison page. In this case, the out-of-the-money credit put spread, with the strikes set at the bearish expected move. This trade is bullish, but may be best though of as being bullish, by not being bearish:
In this example, the credit spread collects about $65, as long as the stock is above $227.50 on expiry. With this credit spread, more has to be risked ($185) than the potential reward ($65). But, because the trade only needs the stock to be above $227.50 on expiry, it carries a high probability of profit.
This “bullish by not being bearish” stance is one way traders can express a view in a 230 dollar stock without the high costs associated of trading options nearer to the current stock price. On a credit spread, the defined ‘risk’, can be thought of similarly to the ‘cost’ one would associate with a long option or a debit spread.
Remember, this should be balanced with an understanding of other risks specific to spreads (such as assignment and execution risk).
Bearish – The same view can be expressed for bearish positioning, in this case with the -247.50c/+250c credit call spread:
Salesforce and Beyond Meat – Using the expected move to sell a credit to both the Bulls and the Bears
Finally, let’s consider the scenario where a trader believes that the options market is overpricing the move in both directions and believe that a stock will stay within the expected move. Rather than not bearish” or not bullish like the directional Credit Spreads above, this trade, an Iron Condor, ‘sells the move’ to both the bulls and the bears. Here are two examples, first in Beyond Meat using the stock’s expected move to initially set strikes, about $15 in either direction:
The Iron condor, which involves simultaneously selling an out-the-money Credit Call Spread and Credit Put Spread seeks to collect the premium (income) received if the stock stays within its expected move.
On these charts one can see the max gain range in the stock, (if the stock remains within the expected move) and the points at which the trade becomes max loss (if the stock has a larger than expected move in either direction). The two breakeven points are labeled where the green turns to red.
Here’s the same example using Salesforce’s expected move, about $11 in either direction:
An Iron Condor is a strategy some traders utilize when they expect implied volatility to go lower. But in this case, with so little time to expiration, the best way to think of this strategy is that if the stock stays within the expected move, it is profitable. If the stock moves beyond the expected move, it is unprofitable.
Please note, any stocks and/or trading strategies referenced are for informational and educational purposes only and should in no way be construed as recommendations. The strategies depicted represent just a few of the many potential ways that options might be used to express any particular view. All prices are approximate at the time of writing. Option spreads involve additional risks that should be fully understood prior to investing.
Learn / Options AI has a couple of free tools, including an earnings calendar with expected moves, as well as education on expected moves and spread trading.