Illinois Tool Works Strangle (ITW)

I like to sell premium but there are also times that I like to buy options and pre-earnings can be a good time to do so, especially with volatility being so low. Running some scans I happened across $ITW that has formed a very tight wedge and the Bollinger Bands are ready to explode. Earnings are scheduled sometime between Jan 25th and Feb 4th so could look at using the newly minted Feb options for this play. They sit at about a 29 on the volatility but there isn’t much in the way of open interest. I always like to represent less than 10% of the open interest as I don’t like trading against the market makers.

There’s decent open interest at both the Feb 50 calls and the Feb 45 puts and both are within my 10% rule. Looks like the strangle would have a +.14 delta so it would be a bit bullish and the net debit would be around 1.55/contract. The break-evens on this trade, assuming a 1.55 debit, would be 43.45 on the downside and 51.55 on the upside.

Strangles can be a total waste of capital assuming $ITW doesn’t move beyond the break-evens. However, I have defined risk ($ 155) and low volatility ahead of earnings. Don’t know if I’ll take this trade or not, but wanted to look at it anyways and thought I’d share what I found.