The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (

Top Gun Options

) --

Strategic Mindset:

In our Advanced

Top Gun Options Model Portfolio we are market neutral with possible surges in volatility.

Target:

Autozone

(AZO) - Get Report

Trading at $321.38

Commit Criteria:

Autozone has a history of making some rapid price movements and IV increases as it approaches its earnings announcement. It will announce its earnings on Dec. 6. Given the chaotic market conditions, there is a good chance of a price movement that can make a significant return. Our biggest risks are a Theta decay of 1.69%/day and the risk of an IV drop in AZO. The Vega % is 7.94% change in IV so we need to watch this. Historically AZO's IV rises into earnings so that should be a help.

Tactic:

Buy to Open 10 JAN 2012 340 Calls and 10 JAN 2012 300 Puts to create a Strangle

Tactical employment:

  • Buying to Open 10 AZO JAN 2012 340 Calls
  • Buying to Open 10 AZO JAN 2012 300 Puts
  • As a Strangle
  • For a net debit of $10.80 ($1080 per strangle for a total of $10800)
  • Maximum Gain: Unlimited
  • Maximum Loss: $10.80 ($1080 per strangle for a total of $10800)

Mid-Course Guidance:

We will be watching for a rise in IV as the earnings announcement approaches and any market moves that put this trade into profitability between now and the announcement date. I will be monitoring this position and sending updates.

Profitability Target:

I would look to sell this Strangle @ $14.58 (35% profit)

Stop Loss (Eject level):

I would look to eject if the Strangle declined to $8.10 (25% loss)

Time Period Exit:

Do not hold this trade past Dec. 5, 2012. The collapse in IV will cause a loss and you must be out before the earnings announcement.

Exit tactic:

  • Sell to Close 10 AZO JAN 2012 340 Calls
  • Sell to Close 10 AZO JAN 2012 300 Puts

Firing Line:

We will maintain discipline on the stop loss criteria in this trade so potential loss of $2700 should be limited over the time period we are trading this in the advanced model portfolio. We will not keep this trade over the actual earnings announcement. This will result in a rapid drop in IV and a high probability of a loss. If you'd like to open a free paper trading account and follow this trade, go here:

www.trademonster.com/tgo Happy hunting and make sure you hedge. From all of us at Top Gun Options, have a great and safe Thanksgiving!

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.