Xerox (NYSE: XRX) Options Traders Make a Post-Earnings Move

With earnings now out of the way for another few months, Xerox XRX investors are evidently feeling empowered to sell straddles.  The short straddle strategy, as George briefly discussed on Friday, is typically used by investors who expect range-bound trading and/or limited volatility in the underlying shares.

Following Xerox's earnings report Thursday, investors sold the January 11 straddle (simultaneously shorting 10,000 of both the January 11-strike calls and January 11-strike puts) Friday morning for a combined credit of $1.48.  At the time, XRX was trading around $11.25.  The call was slightly in-the-money as a result and the put was slightly out-of-the-money, so the call changed hands for 83 cents and the put for 65 cents.

Because the call is in- -the-money, the position has a short delta bias initially.  In a perfect world for this investor, the stock will fall slightly (landing right at the $11 strike) by expiration. If XRX is trading at $11 when the options expire, profit is maximized at $1.48 (100% of the credit collected).  This premium is equivalent to 13.45% of strike, which to me sounds like more than $1.48.

If XRX is trading anywhere between $9.52 and $12.48 at expiration (the strike price minus and plus the credit, respectively), the short straddle will be profitable. Above $12.48, however, losses are theoretically unlimited.  Below $9.52, losses are unlimited down to the zero mark.

XRX is currently scheduled to issue its next earnings report on or around January 20, which is the day before this straddle expires.  As volatility tends to creep higher right around earnings reporting time, it is likely that the straddle seller plans to close his position before these earnings hit the Street.

Short strangles and straddles come with limited reward and unlimited risk, making them a strategy that requires dedicated money management and adequate trading experience.  For additional insight on this short-volatility strategy, register for the free online seminar I'm co-hosting tomorrow after the close. For more information on all upcoming webinars, visit our events page.

Photo Credit: kretyen

 

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