Update on Current Positions and the Twitter Earnings Debacle: A Lesson in Tail Risk

Current Positions:

• +75 USO shares @ 19.00, now 20.11 = +$83.25
• +4 TLT JUN 128/129p @ 0.50, now 0.75 +$100

Back on the 15th I bought some USO shares when it got above 19, which at the time was a short strike in an iron condor I had. I was expecting that it would run up to 20 and might break out, but it was going to be a tough fight and I didn't know how long it might take to get above 20. It's been two weeks, so I wasn't wrong.

Instead of buying a call spread, which could have worked easily, I went with shares because of USO's tight range and the Delta/Gamma of a spread. If USO breaks out of its current 19-20 range, it will move swiftly higher or lower, but as mentioned, it could take some time. If I bought options too far out, the move wouldn't produce enough of a Delta/Gamma move, and too far in, you have the Theta decay, and it could move swiftly downward. I saw this as a prime example of when to use shares over options... low risk, medium reward. Plenty of time to get out for a scratch yet enough time to ride it higher.

What does USO look like now? Well, we got a close above 20, but it still doesn't look like it's gotten above that line in the sand...

If USO can break out of that zone, then I think it will quickly run to the next point of resistance, stopping just above 21 or 22. Upon a break out, I will double up and ride to those red lines.

On the 22, TLT broke down below some short term support, then fought to get back above it, and now today it gapped down pretty hard. What's annoying is that I wasn't able to leg out of my spread at the level I wanted to, because it was passed by the gap down! Who complains when they get short that the thing went down too far?? Either way, I will now leg out if we get a move that hold below the blue line, then look to take profits at either the 1st red or 2nd red line, depending on the "velocity" of the move, ya dig?

The biggest reason I didn't leg out today, however, was because the entirety of today's move was outside of the bollinger bands. Therefore, a snap back up is likely tomorrow, although I think it is likely that we will at least see the 1st red line before too long.

Now, on to Twitter. TWTR was scheduled to release earnings yesterday after the close. However, some company got a leak of the numbers and ironically tweeted them out at 3pm. The stock tanked and trading was halted for around 45 minutes before resuming, tanking even further. Today, it was also down more than 9%.

Often times I will sell what I call a 2SD strangle on earnings announcement days, meaning that my short strikes are 2 standard deviations away from the current price. Well, I was too busy studying for finals to bother with TWTR, although I did want to put on a strangle.

An earnings leak is an extremely rare occurrence, probably 3 or 4 standard deviations out on the probability curve! I would have been HAMMERED. This was a real wake up! Just because there's only about a ~5% chance of losing a bunch of money.... it's still there!