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If we take a look at our calendar here, Ebay comes out with their earnings on the 16th of July, two days before the expiration on the 18th. This is absolutely perfect for our trade. Let’s go ahead. We want to trade now. What we want to do is sandwich our short call here, just a little bit below, in the money.
Let’s go ahead and sell the 25s. Then we’ll go over here to our Analyze tab. We’ll analyze this as a duplicate trade. We have to do these individually, because it is not a trade that the Think or Swim platform automatically recognizes here.
Here is the scenario. This is what we have, just bringing up this tab. The stock is currently at about $27.39. We are selling one of the July 25 calls. We are buying three of the August 30 calls. In other words, we’re playing this bullishly. We’re playing this as a bullish opportunity.
If the stock pops up, we have unlimited upside potential on the stock. If the earnings are bad and the stock tanks, we have found a scenario in which we can make a little bit of money on the downside, if the earnings do stink. In fact, if it comes down to about $23 or so, we make about $85. It’s not too bad.
We still have unlimited upside potential, and we have a little bit of compensation for our time, to put this trade on, $85. If the stock doesn’t move at all, we risk a maximum of $63 on the trade. We can play with these numbers a little bit, and see if we can get something a little bit more favorable.
We can go out to October, and see if that doesn’t help our trades a little bit. In October, if we go out to October for our long 30 calls, our maximum risk is now only about $30. The problem is, if our stock goes down, we could lose $118, $120, $125. If it goes all the way down to $25, we could lose $140. It doesn’t have as much downside protection. We still have our unlimited upside profit, however.
We could do October. Let’s keep it August for now. Let’s play around with the July 25 call a little bit. If we go a little bit lower, maybe if we sell the $22.50 call – that call, if the stock doesn’t move at all, we have a maximum risk of about $80. We do have a lot more downside potential. We have $307, if the stock goes down fairly dramatically.
We still have our unlimited upside on this as well. It really depends on what you think you want to do here. If you want more upside potential, if you think the earnings are going to be really good, you can bring your calls in a little bit. Now, you start to profit right away. You have a little bit more downside risk here. If it really tanks, you’re going to make $30, $35. But if it just goes a little bit down, to $26, you’re going to lose $142.
We can go back up to the 25s. We can go to the 30s. That’s not a bad scenario. With the 30 25s, the stock is currently at 7. We buy three of the 30 calls for August. The maximum risk is about $62. If the stock drops $7 or $8, we make $80. If it goes up like we expect, we have unlimited upside potential.
This is a potentially good trade; the 25 30. I like it. Let’s add another call on there. Let’s see if we can get a little better risk/reward scenario, if we add an extra August call. Instead of 3:1, we’re going 4:1.
At 4:1, we have $70 of downside risk if the stock doesn’t move on the earnings at all, but remember, they’re coming out in the 3rd week of July. We’re short those July 25 calls. If the market doesn’t move, if the stock doesn’t move, we’re out of the trade anyway, right? We probably won’t lose the maximum, but we’ll lose $50, $60 on the trade.
If it tanks, and it goes down, we still have a little bit of downside protection here. We have about $20 or $30 that we can actually make on the downside. But we have a lot more upside potential. This is the one I think I’m going to go for, here. This is buying four of the August 30 calls, and we’re going to sell one of the July 25 calls.
I like that scenario very much. For the earnings announcement coming out in July, I think that’s a great play. We may get assigned the Ebay 25s. This is one more thing that we can do. Instead of going August on this, we can go October, and we could go August on the one that we sold. You can see that this scenario is not quite as favorable.
We can go on to three of these. It’s still not quite as favorable as using the Julys. Let’s go back to the Julys, and use the August. We’ll go up to four of those. I think that’s a very nice scenario right there. There’s very little downside risk at all. We can actually get unlimited upside potential on it.