Good afternoon, everybody. JD here with your Rational Trader Market Analysis Daily.
In today’s video, I’m breaking down a losing trade in Delta Airlines (DAL) that I placed this week — and more importantly, what I learned from it.
This was a mean reversion cash machine trade that didn’t pan out, but it offers a solid teaching moment.
The Setup: A Double Credit Spread
If you were following along earlier this week, I set up a double credit spread — both a call spread and a put spread — around Delta’s earnings, using the July 11 expiration.
On the call side, I sold the $53 strike and bought the $56 strike, collecting about $0.50 in credit. On the put side, I sold a put spread that brought in another $0.24 — and those puts are now out of play and will expire worthless. So we’ll pocket that $0.24.
Unfortunately, the call side got blown out.
DAL Surged After Earnings
Delta stock popped hard this morning after its earnings release, closing up $6.08, or about 12%. That’s way beyond the range I had set for the call spread — putting us solidly in max loss territory on that side of the trade. The total potential loss here was about $2.26 per contract, partially offset by the premium collected.
I’ll be honest: I was nervous about this one all week.
What Had Me Concerned
There was something off with this setup from the beginning. Delta had shown huge post-earnings moves the past two quarters — over 20% down in one case, and nearly 10% in another.
That kind of volatility should’ve pushed up implied volatility (IV), making options more expensive. But this time, IV was unusually low.
That’s a red flag when you’re trying to run a “Cash Machine” setup that is meant to profit from selling inflated premiums.
So why did I take the trade?
I leaned hard on mean reversion here — betting that the prior two quarters were outliers, and that the stock would stick closer to its average price after earnings. It didn’t.
Where It Stands Now
We’re not done yet. Delta closed around $57, which puts it more than two standard deviations above the mean.
I believe that move is unsustainable. I wouldn’t be surprised to see a pullback tomorrow — and if we do, we might recoup some of the paper loss by the time the options expire.
Will it be enough to fully recover the spread? Maybe. Stranger things have happened.
But even if it doesn’t reverse, I’m okay with the risk I took — because I stayed disciplined.
Why I Never Considered Going Naked
One thing I want to emphasize: I never once considered going naked on this trade. (i.e. selling the calls without buying a higher call as a backstop)
The risk of extreme outcomes was just too high. The wide spread in Delta’s recent earnings reactions made defined risk the only logical approach.
This is exactly why the Cash Machine strategy relies on clear guardrails.
Losing Trades Teach, Too
I’m sharing this not to glorify a loser, but to help you understand how I think through these trades — and how I manage risk.
We’re heading into peak earnings season soon — mid-July through the end of August. When the calendar fills out, we’ll have better setups with richer premiums and more predictable behavior.
This one didn’t go our way. But we took the shot, managed the risk, and walked away with a clearer sense of what to look for next time.
Talk soon,
JD
The Rational Trader
