Updated: Aug 1, 2021
Trade: -5 Z 8/6 95p for a $1.30 credit
Category: Earnings Play (HT Wheel)
Max profit: $650 | RoC: 11.52% | RoR: 1.39% | Collateral: $5,642 | Cushion: 11.82%
Zillow is a name that has been on our watchlist for a while and we've had some really nice success selling puts on it. It normally has some decently inflated premiums but with earnings coming up this Thursday, August 5th, the premiums were too good to pass up. It closed trading last Friday at 106.26 which means this trade has an 11.82% cushion with our breakeven price of $93.70 as indicated by the red line on the 180d chart below:
So off the bat we love this entry and breakeven price since it's at a price that Zillow has traded above for the last 180 days. You would have to go back to the beginning of November 2020 to find the last time that Zillow traded below 95. We've mentioned it before but we also love this stock because the housing market has been red hot and they're attempting to take real estate digital. The peak of $200+ that we saw back in February shows there's a lot of potential upside on this ticker and makes us incredibly comfortable to continue to play it if things turn south after earnings. The most important rule to remember is that we only want to sell options on stocks that we're comfortable with owning. Zillow absolutely fits the bill.
Beyond that, let's take a look at the numbers. The current implied move next week for Zillow sits at +/- $8.93, meaning with Friday's closing price of $106.26 Zillow has an expected range next week of 97.33 - 115.19. The strike of this put that we've sold falls just outside of that range which increases the likelihood that we profit.
Now let's take a look at how Zillow has historically performed during earnings:
The last time there was a sizeable drop was Q2 2019, where Z fell from 49.75 down to 42.14. All other observable moves were either positive, or flat enough to where the type of position we currently have opened would result in a win.
I feel this is a high probability trade on a stock that I would be fine with owning at $100, so a $93.70 breakeven on this trade just sweetens the deal for me. If you're using leverage like we are to take advantage of the 11% RoC, be careful you understand the full potential side of the trade if you're assigned. While this only takes up just over $5,000 of collateral for us, getting assigned would result in a $46,000 position and would represent just about a third of our account. That's roughly the high end of the range that we're comfortable with taking on as far as a trade is concerned but we're big fans of Zillow so we would also be okay with allocating more capital to this trade if we needed to play defense. Always keep your potential second and third moves in mind here.
Exit Plan: Perfectly content to let this trade ride until expiry. Very little maintenance on the position expected. If it runs up before earnings and we can collect 40-50% of max profit before Thursday's earnings announcement I'll plan to close it out. Always a fan of taking profits without even having to worry about the risk event (earnings announcement)