About six months ago, I came across an excellent book by Jeff Augen, “The Volatility Edge in Options Trading”. One of the strategies described in the book is called “Exploiting Earnings - Associated Rising Volatility”. Here is how it works:
Find a stock with a history of big post-earnings moves.
Buy a strangle for this stock about 7-14 days before earnings.
Options can be risky, even very risky, but they don't have to be. Today I'm starting a series of articles about options trading. I will show you how options can be less risky or more risky, depending on your risk tolerance. I will show you that there is more than one way to make money with options. I will expose some of the myths and misconceptions about options trading.
Let me begin by saying this: I think that Apple (AAPL) is one of the greatest companies in history. I love the company and own some of its products. But I wouldn't trade it right now. In this article, I will try to describe the price action on Apple from an options trader perspective.
In one of my previous articles, I described the craziness around Apple (AAPL) options as reflected by the options premiums. At some point, the IV (Implied Volatility) jumped to 41%. I presented the following butterfly trade as one possible way to take advantage of this inflated IV:
In my article Why I Wouldn't Trade Apple Right Now, I argued that Apple (AAPL) has gone up too far too fast with no visible reason or significant news. The article provoked a very healthy and long discussion. Unlike many other public forums and discussion boards, the discussion was very civilized and intelligent. This is the power and the beauty of the Seeking Alpha community.
Google (GOOG) reports earnings on Thursday, April 12, 2012, after the market close. There are many ways to play earnings. Some people would bet on the direction of the stock movement after the announcement and buy or short the stock. Others will buy call or put options. My opinion is that predicting the market reaction to earnings is an extremely difficult task.
There is no doubt that Apple (AAPL) had a remarkable run in the last three months. It reached another all time high Thursday at $633. Some people would argue that it's gone up too far too fast. Others say this is only the beginning, based on the fact that the stock is still cheap. Maybe you fall somewhere in between.
I'm asked many times how we choose between Straddle, strangle or Reverse Iron Condor (RIC) for our pre-earnings plays. It's always a balance between risk/reward. All of them benefit from IV jump (vega) and/or price movement (gamma). The biggest (and basically the only) enemy is the negative theta.