Uber Technologies is due to report earnings on Thursday before the opening bell and the options market is pricing in a 7.2% move in either direction. Uber stock stayed above the lower expected range following all six of their last earnings announcements.
Today, we'll set up a trade that fits the view that:
- Uber will stay within its expected range and
- The response to the earnings report is likely to be positive.
Calculating Expected Range For Uber Stock Earnings
With earnings season kicking into high gear, it can be useful to know what market participants are expecting for a stock's move on earnings. Since implied volatility is a key component in option pricing, the option premiums can help give you a rough estimate.
First, take the at-the-money put and call at the nearest expiration after earnings (Nov. 1) and add the two option prices together. That gives you an expected move in either direction of roughly 5.77 as of this morning. You can translate that into a percentage by dividing the expected move by the current price of 79.77. For Uber, the expected range is 7.2%.
Now that we know the expected range, let's find a bull put spread that has the short strike roughly 7.2%, or 5.77, below the stock price. That gives a strike of 74.
If we sell the 74-strike put on Uber with the Nov. 1 expiration and buy a 69-strike put with the same expiration, we'll create a bull put spread. It traded around 56 cents this morning meaning the option trade receives a credit of roughly $56 per contract.
Profits And Losses For Bull Put Spread
If Uber stays above 74 by the expiration, the entire spread will expire worthless. That's a good thing for the option seller as it means you keep the full premium of $56, which is the maximum profit. Given the recent history following Uber earnings, it's not a far-fetched scenario.
However, if Uber surprises to the downside the trade will lose money. The break-even is 73.44, the short strike of 74 less the credit received. Below that number at expiration makes this bull put spread a losing trade. Still the losses don't just keep piling up.
Since the bull put spread is a defined risk trade, the long put acts as protection if the trade goes against you. If Uber falls below 69 at expiration, the trade takes its maximum loss of $444. That's the distance between the strikes less the premium received, or 500 minus 56. No matter how far Uber drops, you won't lose anymore on the trade below a price of 69 at expiration.
That puts the return on risk at 12.6% in just a few days.
Little Room For Adjustment
Since earnings and the expiration are so close on this trade, there is little room for adjustment on the trade. It either works or its doesn't.
A 12.6% return in a few days would be nice, but the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high risk tolerance.
IBD Stock Checkup adds some extra color to how Uber stock ranks over all in its group. Uber is No. 8 in leisure services pitting the ride hailer against cruise lines, fitness, concert venues and event sellers. Uber has a Composite Rating of 85, an EPS Rating of 34 and a Relative Strength Rating of 89.
To revisit a previous trade, the cash-secured put on Tesla worked out well for nice credit.
Remember options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
