ARO Straddle

The Setup
I found this one using prophet charts in TOS. Below is the chart and then I will explain the basic setup:



There are two main things to note with this:
1. Earnings are coming up on 8/21.
2. A week before earnings, the chart shows plenty of consolidation and is unable to break out of the 38-35.7 range.

This is a good setup for a volatility play because I think after earnings are released the stock should break one way or the other. I am somewhat bullish on ARO because Abercrombie has performed poorly this quarter and the general consensus is that ARO has taken away market share from Abercrombie. Additionally, the charts show a bull flag and one would expect the trend to continue after the consolidation. But, the market has been acting randomly and it has been difficult to find an overall trend lately. As such, I am direction neutral - the perfect setup for a straddle.

However, there are drawbacks to this trade. Even though the stock has consolidated, the implied volatility has risen from about 42% to 47% in the past week. This may seem contradictory but the obvious reason is that people are expecting the stock to make a big move after the earnings and as such the demand for options has risen. This of course means that I had to pay a bigger premium to buy my straddle. I will come back and address this point after I explain what I traded.

The Trade:
Bought 5 contracts each of 36 strike calls and puts with Sept expiry.
4.30 net debit per share, total net debit of 2175+24.95= 2199.95
The premium was still only $4.30/share. This is a mere 12% of the stock price. Additionally, even the consolidation range is upwards of $3. As such I foresee the stock almost certainly moving more than $4.30 over the next month.

Max Profit: Infinite
Max Loss: 2199.95 (With Stops, Max should be 800)

Strategy
Post earnings release, I expect the stock to make a big move in either direction, at which point point I should be able to close this position with a nice profit. I am trading volatility here and below, in the risk profile graph, you can see how increased volatility will help me. Either way, I plan to exit the trade at the latest one week after earnings release (unless I see a continuing trend which I can capitalize.

Theta is hurting me on this trade and thus, I should not hold onto this trade for too long. So, like I said, I will not hold onto this trade after 8/28.

Risk
Volatility Risks:


As you can see, if the price does not move at all but the implied volatility moves up 10%, I will make ~$400 on the trade. I would say those are pretty good odds. Of course, conversely, if the price does not move after earnings, the volatility will probably fall in which case I could lose a lot of money. Thus I must keep a close eye on the implied volatility.

Theta Risk:


Like I said, theta is terrible on this trade. In fact, if the volatility remains constant, I have virtually no chance of profit on this trade.