Earnings Trade on RH – Profit of $1,429…..should have been more

On 3/19 we set up an earnings trade on RH. We established a Covered Call (Bought 100 shares at $515.77 and sold a deep in the money $470 Call option. Volatility was extremely high so we received excellent premiums of $58.10 per share. With the shares trading at $515 and expected earnings move of +/- 14% we thought we were being conservative with a $470 strike price. In addition to the CC we set up a deep out of the money Bull Put Spread to capture more premium. We sold the $470 Put and bought $450 Put…..with the expectation we had minimal risk of getting Put the shares (they were $50 out of the money and we didn’t want to have to buy 300 shares @$470). Much to our surprise in the two days before earnings RH stock fell from $515 to $480…..and we were now well within the expected earnings move range. We bought back the Bull Put Spread at a loss of $655. We sold a new Bull Put Spread at lower strikes ($440/$420).

Turned out RH earnings were good and after a quick dip the stock rose back up over $500….so we left money on the table. On the Covered Call we lost $4,577 on the stock, made a profit of $5,809 on the short call option for an overall profit of $1,232. The 2 Bull Put Spreads made a combined profit of $197 (would have been $1,400 if we had just sat on the initial spread).

I don’t usually do “earning trades” due to the volatility and uncertainty….so we made a bit of money and got a little stressed!

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