Updated: Aug 19, 2021
Trade: -20 WISH 8/13 8p for a $0.20 credit
Category: Earnings (HT Wheel)
Minimum Collateral to Enter: $400 ($780 fully cash-secured)
Max profit: $400 | RoR: 2.56% | Collateral: $8,000 | RoC: 5.00% | Cushion: 17.02%
We love earnings trades on Thursday afternoons. You get insanely rapid theta decay on an option that expires the next day and combining that with post-earnings volatility crush is usually a pretty consistent winning formula. Unfortunately we chose the one stock that reported this afternoon and absolutely tanked. But as is typically the case, it's going to be okay and here's why:
Let's start with our basic position. Here is what that looks like:
Our breakeven is $7.80 and this is the calculation of the trade using $7.55 as the stock price at expiry tomorrow, which is roughly where it wrapped up trading in the AH period. So what do we do from here. If we follow the typical HT Wheel strategy, the plan is to double down at this point by selling cash secured puts. I really like the idea of jumping in on some CSP's tomorrow at market open with 8/13 expiry. If WISH opens at $7.55+ I'll sell 7.5p. If it opens lower than that I'll sell 7p. The idea here is that there should be a decent amount of premium in those from this sharp drop and we can capture that premium before it gets crushed.
Further, doing this will lower our basis on a cent for cent basis. So if we're able to get $0.20-30 on a 7.5p at market open, our breakeven price on the trade will drop to $7.50-7.60 first thing in the morning. Let's assume we can sell a 7.5p for $0.25. Here is what that would look like.
Just like that, we're right back to breakeven if WISH finishes at 7.55. If it finishes below $7.50, our basis in the 4,000 assigned shares will be $7.52 (7.80 adjusted basis on the 8p and $7.25 adjusted basis on the 7.5p). From there the plan would be to go ultra-conservative and sell an ITM 7c for 8/20, which I imagine would offer roughly 30 cents of extrinsic value for the upcoming week. This is what assignment and sale of the ITM call would look like (assuming the price finishes at $7.50, we're assigned, and get $0.80 for an 8/20 7c):
All of a sudden, we have a breakeven price of $6.73 (which is what's shown above and used for the calculation). As far as the figures above are concerned, rows 1 and 2 show max profit because we collect that premium no matter what. The consequence of selling those puts is just that we have to purchase shares at 8 and 7.50, which average out to the 7.75 basis shown in row 3. The premium 7c in row 4 will be collected no matter what, so that shows as max profit as well. The only consequence of that is that the most we can dump the shares for is $7 apiece, which becomes the new max profit scenario. Getting those shares called away for $7 next Friday in that new max profit scenario would look like this:
So with this new hypothetical breakeven of $6.73, we also put ourselves in a position where the stock could have dropped 25% on us and we still walk away with $1,100 profit come next Friday which would represent a 6.88% return in 8 days despite the fact that selling that 7c in the money may be considered "conservative".
Important to note that there are a couple of assumptions here that could change big time as the day plays out. The first is that WISH opens and finishes around 7.50. It could open/finish way higher and lower, but the most likely price is the one it's currently at so that's what we used for this plan.
The second assumption here is that a 7c, which is roughly 50 cents ITM in this hypothetical situation, will carry 30 cents of premium for the upcoming week. I don't think this is unreasonable based on the IV environment WISH carries but a big price swing one way or the other could throw off this estimate.
Bottom line is I think we should be able to get our breakeven price by 8/20 below $7/share with relative ease. Now the question is whether or not we're comfortable with that.
The earnings report and letter they released today was really, really bad. You can read it for yourself here: https://ir.wish.com/static-files/dc1737e7-8550-4dfa-9ca0-51ea419f5441.
I tell myself that I only want to run the wheel on stocks that I am comfortable holding but as we outlined above I think the numbers are really working in our favor here so I at least want to give it a shot for a week to see what happened and where we can get that basis by the end of the day on Friday. If the premium for next week isn't as great as we had hoped in what we outlined above we'll likely just take the L and move on. Nothing wrong with taking a small loss to ensure we don't run into something that derails our success so far this year. Because if we jump into the 7.5p tomorrow at open and then WISH finishes at 7/share, we're going to be $2k in the hole off the bat. So we'll wait until tomorrow morning to see how things look and then we'll finalize our plan of attack for the day. Don't panic and trust the process.