The day after the midterm elections, the S&P 500 is up about 1.5% and the VIX has fallen to around 17.5. Brian Overby’s take: markets prefer known outcomes, and the lack of post-election unrest matters as much as the results. Democrats won both the House and Senate while a Republican holds the White House, and markets often like the predictability of a split government. He notes that November after a midterm has historically tended to be strong, though past patterns don’t guarantee anything. Then he turns to the trade that’s being tested. On Monday he sold an Apple skip-strike call butterfly — buy the 355, sell two 357.50s, skip 360, buy the 362.50 — for a 25-cent credit, as a neutral-to-bearish alternative to a short call spread. Apple is now up about 6% to the mid-350s, an unusually large move for Apple and bigger than its typical earnings move. The position is roughly break-even. Brian uses it as a lesson in how butterflies can be adjusted. One option is to sell the 355 and buy another 362.50, turning the butterfly into two five-point short call spreads and collecting about $3.20 more; that brings in more premium but means Apple must stay below 357.50 by Friday, with larger total risk. A smaller version rolls into a single short spread for about $1.20. He also points out that the trade simply needs time decay, and that he’d feel better if it were Thursday rather than Wednesday. Partway through he realizes he had been looking at the wrong expiration and corrects the numbers on air, showing the position up slightly, with the choice to close it or let it run. Next, two new earnings trades in the November 6 expiration: – Airbnb, up about 6% to around $178 and reporting Thursday after the close. Travel stocks have been gaining as oil falls. He buys the 180 call, sells two 190 calls and buys the 195, an open-wing call butterfly for about $2.30. – Moderna, up about 8.6% to around $248 and reporting Friday before the open, with implied volatility near 141%. He buys the 255 call, sells two 270 calls and buys the 277.50, for about $3.00. Open-wing butterflies like these profit most if the stock lands near the short strike at expiration, still make something if the stock rises through all the strikes, and risk only the premium paid. Key takeaways: – Split government and fewer unknowns helped markets after the election. – Butterflies can be rolled into short spreads if the stock moves against you. – Short-dated structures need time decay to work. – Open-wing butterflies give defined-cost bullish exposure into earnings. Options involve risk. This episode is educational and not a recommendation. |
