Bullish last minute bet on $CHWY for earnings

Lesson in Course: Expert Insights (expert, 14min)

Bryce, an expert options trader walks me through the basics of a one-way bet on $CHWY. Do I end up making money?

00:23 Why I like the stock

Looking outside, I see eight-week-old puppies all the time here in new york city and so I feel like there's going to be actually a pretty big beat on revenue. I want to play earnings because I see that the stock has pulled back from recent highs.

01:09 Options chain for CHWY

03:46 Break-evens

The 81 strike calls expire in 2 days and the asking price is $3.55 per share or $355 for a single contract of 100. The break-even is when this option would start becoming profitable for me and it’s currently at $84.55 or $81+$3.55. By buying this call option, we're basically betting that if the stock ends in two days above $84.55 I should make money, or about a 5% move on earnings.

05:30 Straddles and market makers

Market-makers have set expectations for the earnings move tomorrow. We can see the expectations that are priced in by looking at at-the-money straddles. The current stock is trading at eighty dollars per share, and the current straddle is $7.90, which is the sum of the premiums for the $80 strike call option and $80 strike put option. What the market makers are saying is they are expecting this stock to move ten percent tomorrow. Or $7.90 / $80.

Expert insight: The only reason why I bring that up is when you're considering buying these calls you’ve got to look at the expectation that the market makers are putting on this earning move for tonight after the close. You only need a 5% move to make money while the market makers are pricing in 10%.  Market makers often use previous earnings moves to determine the spread.

11:32 In-the-money vs at-the-money calls

Simon: “Since this bet is so risky—I will lose all money in 2 days if CHWY does not move up 5%, should I buy a lower strike or deep in-the-money option for protection?”

Bryce: “If you're in the money that means you have an intrinsic value in there so if the stock were to settle at $80 right now and let's say you're buying the $85 calls, you have five dollars in intrinsic value. At the $75 calls, they're at seven bucks so that means there's a $2 premium so you still lose $200 if it settles right here so it's that's the thing you got to look at the premium and how much cash you're going to outlay. Just because you're buying in-the-money doesn't mean you're going to settle in-the-money.

13:22 Call Spreads, a cheaper bet

If $4 per share or $400 for a single option is too much premium to pay, we can do something called a call spread. In this case, it would be to buy a call option and sell a call option. A call spread effectively lowers the price while sacrificing some of the upside gains.

See the call spread here.