Bullish Pre-Earnings Trade in HOOD | Option Trades Today

Hood (HOOD) Options Trade Analysis - February 10th Earnings Play

Key Concepts:

• Omnidirectional Trade: A strategy designed to profit regardless of the direction the underlying asset moves, often involving a combination of buying and selling options.
• Implied Volatility (IV) Rank: A measure of the current implied volatility of an asset relative to its historical volatility. A rank of 21 suggests relatively low volatility.
• Delta: A measure of an option's sensitivity to changes in the price of the underlying asset. Positive delta means the option's value increases with the stock price, negative delta means it decreases.
• Theta Decay: The rate at which an option loses value as time passes.
• POP (Probability of Profit): The likelihood that an options trade will be profitable at expiration.
• Break-Even Point: The price of the underlying asset at which the options trade will neither make nor lose money.
• Defined Risk: A trading strategy where the maximum potential loss is known and limited.
• Undefined Risk: A trading strategy where the maximum potential loss is not known and is theoretically unlimited.
• Open Interest: The total number of outstanding options contracts for a particular strike price and expiration date.

I. Market Overview & Hood Selection

The S&P 500 is currently at new highs (7,8, up 35 points). However, Hood (Robinhood) is lagging behind, trading around $107 while its previous highs were around $150. This discrepancy is the basis for the trade discussed. The trade was initiated with Hood trading at $106.61.

II. Rationale for a Bullish Play on Hood

Despite the overall bullish market, Hood has underperformed, exhibiting a correlation of 0.40-0.50 with the broader market, which is lower than its typical behavior. This is attributed to Hood’s exposure to the cryptocurrency market, which has been trading sideways to lower. The speaker believes Hood is potentially undervalued and poised for a rebound leading up to its earnings announcement on February 10th.

III. Trade Structure & Mechanics (Omnidirectional, Slightly Bullish)

The trade is structured as an omnidirectional, slightly bullish strategy utilizing February options (expiration date chosen for maximum earnings impact). The specific trade details are:

• Buy 1 HOOD 105 Put: This creates a negative delta.
• Sell 2 HOOD 100 Puts: This offsets the negative delta, resulting in a net long delta of approximately 20.
• Cost: The trade was executed at a cost of $1.95 per share, with the stock price around $30-$40 cents lower than its current level. The speaker emphasizes not chasing the price.
• Buying Power Used: Approximately $1,800.
• Break-Even Point: Below $95.

The rationale for this structure is to benefit from a potential increase in Hood’s price (long delta) while still maintaining some downside protection.

IV. Risk Management & Potential Outcomes

• Upside Scenario: If Hood’s price increases, the long delta will generate profit.
• Downside Scenario (Slow Move): A slow, steady decline in Hood’s price below $100 will also generate profit, up to a maximum of $500 plus the initial credit received.
• Probability of Profit (POP): 77%.
• Theta Decay: Approximately $12 per day.
• 50% Profit Chance: 80%+ chance of achieving 50% of the initial credit received.
• Maximum Profit: $680.

V. Defining Risk – Reducing Buying Power

The speaker discusses a strategy to define risk by adding another put option:

• Buy 1 HOOD 80 Put (or 85 Put): This reduces the maximum potential loss.
• Buying Power Reduction: From $1,800 to approximately $1,000.
• Impact on Metrics: Minimal impact on POP (76% vs. 77%), Theta Decay (reduced), and Maximum Profit (remains largely the same). Delta is slightly reduced.

This option is presented for traders who prefer a more conservative approach with limited risk.

VI. Volatility & Earnings Expectation

• Implied Volatility: Hood’s implied volatility is considered decent (IV Rank of 21), but not exceptional.
• Expected Move (Earnings): A $13 expected move for February options, and a $7 expected move for the next 10 days leading up to the February 10th earnings announcement. The speaker expresses hope that volatility doesn’t expand too much before earnings.
• Volume & Open Interest: Hood has decent volume and open interest, indicating sufficient liquidity for the trade.

VII. Trade Monitoring & Adjustment

The speaker notes that the spread has moved as expected with the stock’s recent weakness and suggests waiting for the stock to move further before potentially adjusting the trade. He prefers to establish long delta when the stock is declining.

VIII. Call to Action

The speaker encourages viewers to open an account with Tasty Trade, highlighting it as the “number one brokerage firm in the galaxy” and emphasizing the importance of supporting the platform to keep its content free.

Conclusion:

This trade is a nuanced, omnidirectional play on Hood, capitalizing on its underperformance relative to the broader market and anticipating a positive reaction to its upcoming earnings announcement. The strategy involves a combination of put options designed to generate profit regardless of the direction Hood moves, with a slight bullish bias. The speaker provides a detailed breakdown of the trade’s mechanics, risk management considerations, and potential outcomes, offering both a conservative (defined risk) and a more aggressive (undefined risk) approach. The trade is predicated on Hood’s earnings announcement driving a significant move in the stock price.