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How NOT to trade NFLX earnings

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    • By Kim
      Introduction
      The first question you need to answer is: will you hold your position through earnings, or will you close it before the announcement. 
       
      In some of my previous articles, I described few ways to trade earnings if you don't want to hold the trade through the announcement. Our favorite ways to do it are with Straddles and Calendar Spreads. Personally I don't like to hold those trades through earnings. But if you decide to do so, please make sure you do it the proper way and understand the risks.

      So if you decided to hold, the next questions would be: directional or non directional? Buy premium or sell premium?

      Here is a simple way to look at potential trades. The options market will always tell you how much stock movement the options market is pricing in for earnings, or any event. 
       
      For example, let’s take a look at what the options market was expecting from Apple (AAPL), which reported earnings last month.
       
      With AAPL stock trading at 190 we need to look at the price of the straddle closest to 190. And these options need to be the calls and puts that expire the week of earnings.

      In this case, with earnings on July 31, we look for the options that expire on Friday, August 3. The calls were worth approximately $4.85, and the puts were worth $4.27 just before earnings were announced. When we combine these two values it tells us that the options market is pricing in an expected move of $9.12, or 4.8%, after earnings. This is what we call the "implied move".

      Now you need to do some homework and decide if you believe the options are overpriced (and the stock will move less than the implied move) or underpriced (and the stock will move more than the implied move).
      Buying Premium
      If you believe that the options are underpriced, you should buy premium, using a long straddle or a long strangle.

      If you buy a straddle, then the P/L is pretty much straightforward:
      If the stock moves more than the implied move after earnings, your trade will be a winner. If the stock moves less than the implied move after earnings, your trade will be a loser. Taking AAPL earnings as an example:
       
      The straddle implied $9.12 or 4.8% move. In reality the stock moved almost $12, or ~6.0%. Which means that the straddle return was over 25%.

      Strangle is a more aggressive strategy. It would usually require the stock to move more to produce a gain. But if the stock cooperates, the gains will be higher as well. In case of AAPL, doing 185/195 strange would produce over 40% gain (all prices are at the market close before and after earnings).

      Obviously if the stock did not cooperate, the strangle would lose more as well. Which makes it a higher risk higher reward trade.
       
      Selling Premium
      If you believe that the options are overderpriced, you should sell premium. You can sell premium in one of the following ways:
      Sell a (naked) straddle. This strategy is the opposite of buying a long straddle, and the results will be obviously opposite as well. If the stock moves more than expected, the trade will be a loser. If it moves less than expected, it will be a winner.
        Sell a (naked) strangle. This strategy is an opposite of buying a long strangle, and similarly, a more aggressive trade. Take the last FB earnings for example. Selling 1 SD strangle would produce a $208 credit. When the stock was down almost 20% after earnings, the trade was down a whopping $2,407, which would erase 12 months of gains (even if ALL previous trades were winners). This is why I would recommend never holding naked options positions through earnings. The risk is just too high.
        Buy an iron condor. This strategy would involve selling a strangle and limiting the risk by buying further OTM strangle. In case of a big move, your loss is at least limited. Selling options around 1 SD would produce modest gains most of the time, but average loss will typically be few times higher than average gain.
        Buy a butterfly spread. This strategy would involve selling a straddle and limiting the risk by buying a strangle. In case of a big move, your loss is at least limited, like with iron condor. This strategy has much more favorable risk/reward than iron condor, but number of losing trades will be much higher as well.
        Buy a calendar spread. This strategy would involve selling ATM put or call expiring on the week of earnings and buying ATM put or call with further expiration. The rationale is that near term short options will experience much bigger IV collapse than the long options, making the trade a winner. To me, this would probably be the best way to hold through earnings in terms of risk/reward and limiting the losses. As a rule of thumb:
      If the stock moves as expected after earnings, all strategies will be around breakeven. If the stock moves more than expected after earnings, all premium buying strategies will be winners, and all premium selling strategies will be losers. So which one is better?
      To me, any strategy that involves holding through earnings is just slightly better than 50/50 gamble (assuming you did your homework and believe that you have an edge). Earnings are completely unpredictable. Selling options around earnings have an edge on average for most stocks, but they have a much higher risk than buying options, especially if the options are uncovered. Those "one in a lifetime events" like Facebook 20% drop happen more often than you believe.

      Many options "gurus" recommend selling premium before earnings to take advantage of Implied Volatility collapse that happens after earnings. What they "forget" to mention is the fact that if the stock makes a huge move, IV collapse will not be very helpful. The trade will be a big loser regardless.
      Directional or non directional?
      So far we discussed non directional earnings trades, where you select ATM options. But those trades can be structured with directional bias as well. For example:
       
      If you were bullish before AAPL earnings and believed the stock will go higher, instead of buying the 190 straddle, you could buy the 185 straddle. This trade would be bullish, and earn more if the stock moved higher, but it would also lose more than ATM straddle if you were wrong and the stock moved down. As an alternative, you could buy an OTM calendar (for example, at $200 strike). If you were right, you would benefit twice: from the stock direction and IV collapse. But you would need to "guess" the price where you believe the stock will be trading after earnings with high level of accuracy. If you guess the direction right, but the stock makes huge move beyond the calendar strike, you can still lose money even if you were right about the direction.

      For example, the 190 (ATM) calendar would lose around 40-50% (which was expected since the stock moved more than the implied move). But the 200 (OTM) calendar would gain around 120% since the stock moved pretty close to the 200 strike, so you gained from the IV collapse AND the stock movement.
      Conclusion
      Earnings trades are high risk high reward trades if held through earnings. Anything can happen after earnings, so you should always assume 100% loss and use a proper position sizing. Traders who advocate those strategies argue that they can always control risk with position sizing, which is true.

      But the question is: if I can trade safer strategies and allocate 10% per trade, why trade those high risk strategies and allocate only 2% per trade? After all, what matter if the total portfolio return. If a trade which is closed before earnings earns 20% (with 10% allocation), it contributes 2% growth to the portfolio. To get the same portfolio return on a trade with 2% allocation, it has to earn 100%.

      Is it worth the risk and the stress? That's for you to decide.

      Related articles:
      How We Trade Straddle Option Strategy Buying Premium Prior To Earnings - Does It Work? Why We Sell Our Straddles Before Earnings Selling Strangles Prior To Earnings How We Trade Calendar Spreads Long Straddle Through Earnings Backtest
    • By Kim
      FB is one of the mostly watched stock in the US stock market. Many options traders try to play earnings using FB options. 

      There are few alternatives. We will backtest them using CMLviz Trade Machine.
       
      1. Buying Call Options
      This strategy involved buying call options on the day of the earnings announcement and selling them the next day. Here are the results:



      Tap Here to See the back-test

      This doesn't look so good. How about a bearish trade?
      2. Buying Put Options
      This strategy involved buying put options on the day of the earnings announcement and selling them the next day. Here are the results:



      Tap Here to See the back-test

      Looks much better. However, this result was heavily impacted by the last earnings release. You remove the gains from the last cycle, the strategy would be a loser as well.



      Tap Here to See the back-test

      How about buying a straddle (both calls and puts)?
      3. Buying a straddle
      This strategy involved buying a straddle on the day of the earnings announcement and selling them the next day. Here are the results:



      Tap Here to See the back-test

      Once again, big chunk of the gains came from the last cycle when the stock tanked ~20%. Removing the last cycle causes the overall return to become negative:



      Tap Here to See the back-test

      How about selling the straddle?
      4. Selling a straddle
      This strategy involved selling a straddle on the day of the earnings announcement and selling them the next day. Here are the results:



      Tap Here to See the back-test

      Overall loss - but again, ALL of the total loss came from the last cycle. If we remove the last cycle, the overall result becomes positive:



      Tap Here to See the back-test

      We performed the back testing using the CMLviz Trade Machine which an option back-tester created by Capital Market Laboratories (CML). It is a very powerful tool that allows you to back test almost any possible setup.

      Tap Here to See the Tools at Work 

      Those backtests confirm what we already knew (more or less):

      Buying straddles before earnings is on average a losing proposition. You will lose most of the time, but you might win big couple times when the stock makes a huge move.
       

      Chart from optionslam.com.

      Based on those statistics, many options "gurus" suggest selling options on high flying stocks like FB,AMZN, NFLX etc. They claim this is a "high probability strategy".

      What they "forget" to mention (or maybe simply don't understand) is that high probability doesn't necessarily mean low risk.

      Here is an excellent example used by our guest contributor Reel Ken:

      We load a six-shooter gun with one deadly round and play Russian Roulette for $100 per trigger squeeze. The odds are 83% (5/6) that you win. Does that make it low-risk? What would low-risk look like? How about a 13-round Glock where your probability of success is over 90%. For certainly, if one defined risk as favorable odds, we would expect many takers, but I'll bet there wouldn't be any.
       
      The reason is simple: One doesn't define risk by the probability of success. I often see this mistake when pundits promote investing strategies such as selling deep-out-of-the-money-puts (DOTM) on volatile stocks and lauding the low-risk-nature of the trade. "The stock would have to drop over x% (6%,7%, 10%) for you to lose". Well, Facebook reminded us of the real risk in such strategies.

      Yes, risk isn't the chance of loss, it is the magnitude of potential loss. Too many simply confuse probability with risk.

      This confusion is because investors don't understand there is a completely other operative metric. They can easily put their hands around the potential loss and even recognize when a probability is very high or very low (I hope).

      But probability isn't risk. And, though maximum loss is risk, maximum loss is very, very rare. The maximum loss on the S&P is it going to ZERO, and though that's possible, it isn't helpful for us to evaluate investing loss.


      Lets check how this strategy would work for FB in the last cycle, by selling 1 SD strangle on the day of earnings. With the stock trading around $217, you would be selling 232.5 calls and $202.5 puts, for $208 credit. This is how P/L chart would look like:


       
      The trade would tolerate around 7% move in each direction, which would work well most of the cycles. Based on the options deltas, the trade had ~70% probability of success. Not bad.

      As a side note, the trade would require around $2,850 margin, so even if you kept the whole credit, your return on margin would be around 7%.

      Fast forward to the next day after earnings have been announced and the stock was down almost 20%:



      The trade was down a whopping $2,407, which would erase 12 months of gains (even if ALL previous trades were winners).
      Conclusions
      Earnings are completely unpredictable. In order to make money from earnings trades held through the announcement, too many things have to go right and too many things can go wrong. Selling options around earnings have an edge on average for most stocks, but they have a much higher risk than buying options, especially if the options are uncovered. Don't confuse high probability with low risk. You can win 70-80% of the time, but you can also lose few times in a row. And when you lose, you can lose big time. Those "one in a lifetime events" happen more often than you believe. Even if you did your homework and backtesting and decided to hold your trade through earnings, always assume a 100% loss and size your position accordingly. Even if the backtesting shows 90% winning ratio for a certain strategy, one huge move (in any direction) can erase months and months of gains. The bottom line: trading options around earnings can be a very profitable strategy - but closing the positions before earnings will produce much more predictable and stable results with much less volatility.

      "Trying to predict the future is like driving down a country road at night with no headlights on and looking out the back window." - Peter Drucker
       
      Related articles:
      Why We Sell Our Straddles Before Earnings Why We Sell Our Calendars Before Earnings How NOT To Trade NFLX Earnings Betting On AAPL Earnings?
    • By Kim
      In this article, I will show why it might be not a good idea to keep those options straddles through earnings.
       
      As a reminder, a straddle involves buying calls and puts on the same stock with same strikes and expiration. Buying calls and puts with the different strikes is called a strangle. Strangles usually provide better leverage in case the stock moves significantly.
       
      Under normal conditions, a straddle/strangle trade requires a big and quick move in the underlying. If the move doesn’t happen, the negative theta will kill the trade. In case of the pre-earnings strangle, the negative theta is neutralized, at least partially, by increasing IV.
       
      The problem is you are not the only one knowing that earnings are coming. Everyone knows that some stocks move a lot after earnings, and everyone bids those options. Following the laws of supply and demand, those options become very expensive before earnings. The IV (Implied Volatility) jumps to the roof. The next day the IV crashes to the normal levels and the options trade much cheaper.

       
      Over time the options tend to overprice the potential move. Those options experience huge volatility drop the day after the earnings are announced. In many cases, this drop erases most of the gains, even if the stock had a substantial move. In order to profit from the trade when you hold through earnings, you need the stock not only to move, but to move more than the options "predicted". If they don't, the IV collapse will cause significant losses.
       
      Here is a real trade that one of the options "gurus" recommended to his followers before TWTR earnings:
       
      Buy 10 TWTR Nov15 34 Call
      Buy 10 TWTR Nov15 28 Put
       
      The rationale of the trade:
       
      Last quarter, the stock had the following price movement after reporting earnings:
      Jul 29, 2015 32.59 33.24 31.06 31.24 92,475,800 31.24
      Jul 28, 2015 34.70 36.67 34.14 36.54 42,042,100 36.54
      I am expecting a similar price move this quarter, if not more. With the new CEO for TWTR having the first earnings report, the conference call and comments will most likely move the stock more than the actual numbers. I will be suing a Strangle strategy. 9/10.
       
      Fast forward to the next day after earnings:
       

       
      As you can see, the stock moved only 1.5%, the IV collapsed 20%+, and the trade was down 55%.
       
      Of course there are always exceptions. Stocks like NFLX, AMZN, GOOG tend on average to move more than the options imply before earnings. But it doesn't happen every cycle. Last cycle for example NFLX options implied 13% move while the stock moved "only" 8%. A straddle held through earnings would lose 32%. A strangle would lose even more.
       
      It is easy to get excited after a few trades like NFLX, GMCR or AMZN that moved a lot in some cycles. However, chances are this is not going to happen every cycle. There is no reliable way to predict those events. The big question is the long term expectancy of the strategy. It is very important to understand that for the strategy to make money it is not enough for the stock to move. It has to move more than the markets expect. In some cases, even a 15-20% move might not be enough to generate a profit.
       
      Jeff Augen, a successful options trader and author of six books, agrees:
       
      “There are many examples of extraordinary large earnings-related price spikes that are not reflected in pre-announcement prices. Unfortunately, there is no reliable method for predicting such an event. The opposite case is much more common – pre-earnings option prices tend to exaggerate the risk by anticipating the largest possible spike.”
       
      Related Articles:
      How We Trade Straddle Option Strategy
      Buying Premium Prior to Earnings
      Can We Profit From Volatility Expansion into Earnings
      Long Straddle: A Guaranteed Win?
       
      We invite you to join us and learn how we trade our options strategies in a less risky way.
       
      Start Your Free Trial
    • By Kim
      Are You Ready For the Drawdowns?
       
      When thinking about big winners in the stock market, adversity and large drawdowns probably aren’t the first words that come to mind. We tend to put the final outcome (big long-term gains) on a pedestal and ignore the grit and moxie required to achieve that outcome.
       
      But moxie is the key to long-term investing success, for there is no such thing as a big long-term winner without enduring a big drawdown along the way…
       
      Amazon has gained 38,882% from its IPO in 1997, an annualized return of over 36%. To put that in perspective, a $100,000 investment in 1997 would be worth just under $39 million today.
       

      Breathtaking gains, but they were not realized without significant adversity. In December 1999, the initial $100,000 investment would have grown to $5.4 million. By September 2001, less than 2 years later, this $5.4 million would shrink down to $304,000, a 94% drawdown. It took over 8 years, until October 2009, for Amazon to finally recover from this drawdown to move to new highs.
       

       
      Just Bump In The Road?
       
      Most investors remember the last few earnings reports when the stock usually went up after earnings, but the picture was not always that rosy. Here is the history of AMZN reaction to earnings in the last 3 years (courtesy of optionslam.com):
       

       
      As you can see, 2014 wasn't pretty. And it was a year when S&P 500 was up 13.6%.
       
      After today's report, AMZN investors have to ask themselves the following questions:
      Is it still a good buy? Is the current pullback just bump in the road or there is more downside ahead of us? Is the growth story over? Is the stock still reasonably priced at current levels?  
      What if you decide to sell and the stock recovers nicely? Or maybe you buy and the stock continues lower?
       
      We Don't Care!
       
      Fortunately, as non-directional options traders, we don't really care. We just closed AMZN calendar spread today before the earnings for 30.0% gain. This was a non-directional trade based on Implied Volatility. Specifically, volatility skew that always exists between the front week and the more distant expiration.
       
      We have been implementing this strategy since 2013 with great success on stocks like AMZN, NFLX, GOOG, TSLA and more. Here are the results:
       

       
      Some of the advantages of this strategy:
      We don't care about the direction the stock goes. We don't care about fundamentals. We don't have to guess if the growth story is still intact. We don't need to time the market, "buy the dip" or "sell the strength".  Instead, we can just relax and enjoy our gains, no matter what the stock does.
       
      Related Articles:
      How We Trade Calendar Spreads Can We Profit From Volatility Expansion into Earnings Why We Sell Our Calendars Before Earnings The Less Risky Way To Trade TSLA TSLA, LNKD, NFLX, GOOG: Thank You, See You Next Cycle Thank You FANG Stocks!  
      If you want to learn more how to use our profitable strategies and increase your odds:
       
      Start Your Free Trial
    • By Ophir Gottlieb
      There is a bullish momentum pattern in Netflix Inc (NASDAQ:NFLX) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market. 

      LOGIC 
      The logic behind the back-test is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date. 

      Stock Chart 
      We can start with a stock return chart over the last year comparing Netflix (in red) to the rest of FAANG. 
       


      Netflix has more than doubled the rest of the high momentum crew. 

      The Bullish Option Trade Before Earnings in Netflix Inc 
      We will examine the outcome of getting long a weekly call option in Netflix Inc 7-days before earnings (using calendar days) and selling the call before the earnings announcement. 

      Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result. 
       


      RISK MANAGEMENT 
      We can add another layer of risk management to the back-test by instituting and 50% stop loss and a 50% limit gain. Note that this is a little different from our normal 40% stop and limit. Here is that setting: 
       


      In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed. 

      Back-test Discovery 
      We found this back-test by looking at pre=-earnings strategies in the Nasdaq 100. We focused on 3-year results, and sorted by wins. 
       


      Don't worry, we will talk about those six companies with better scan results soon, but Netflix has a nice narrative around it that stands out. 

      RESULTS 
      Here are the results over the last three-years in Netflix Inc: 
       
      NFLX: Long 40 Delta Call   % Wins: 75%   Wins: 9   Losses: 3   % Return:  173% 
      Tap Here to See the Back-test
      We see a 173% return, testing this over the last 12 earnings dates in Netflix Inc. That's a total of just 84 days (7-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result. 

      We can also see that this strategy hasn't been a winner all the time, rather it has won 9 times and lost 3 times, for a 75% win-rate and again, that 173% return in less than six-full months of trading. 

      Setting Expectations 
      While this strategy had an overall return of 173%, the trade details keep us in bounds with expectations: 
            ➡ The average percent return per trade was 26%. 
            ➡ The average percent return per winning trade was 47.7%. 
            ➡ The average percent return per losing trade was -39%. 

      Back-testing More Time Periods in Netflix Inc 
      Now we can look at just the last year as well: 
       
      NFLX: Long 40 Delta Call   % Wins: 75%   Wins: 3   Losses: 1   % Return:  105% 
      Tap Here to See the Back-test
      We're now looking at 105% returns, on 3 winning trades and 1 losing trades. It's worth noting again that we are only talking about one-week of trading for each earnings release, so this is 105% in just 4-weeks of total trading. 
            ➡ The average percent return over the last year per trade was 26.1%. This is remarkably similar to the three-year result of a 26% average return. 
            ➡ The average percent return per winning trade was 40%. 
            ➡ The average percent return for the one losing trade was -15.7%. 

      Going Yet Further 
      While we're at it, we can take a look what really sets this back-test apart from some others that actually have slightly higher win rates. We are also focused on the 9-month back-test: 
       
      NFLX: Long 40 Delta Call   % Wins: 100%   Wins: 3   Losses: 0   % Return:  131% 
      Tap Here to See the Back-test
      We can see that Netflix has a bit of streak to it right now with three consecutive pre-earnings one-week long call back-tests showing wins, with an average return of 40%. 

      WHAT HAPPENED 
      Bull markets tend to create optimism, whether it's deserved or not. With the recent history of outperformance of the other FAANG stocks and nice winning streak, this gets twice the attention and is worth noting well ahead of the next event. To see how to test this for any stock we welcome you to watch this quick demonstration video: 
      Tap Here to See the Tools at Work 

      Risk Disclosure 
      You should read the Characteristics and Risks of Standardized Options. 

      Past performance is not an indication of future results. 

      Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. 

      Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
       
    • By Jacob Mintz
      I began my career on the floor of the Chicago Board of Options Exchange in 1999 straight out of college. For a year, I stood next to two options trading legends, soaking up all of their wisdom as their clerk. That year, the market ripped higher as virtually every dot-com stock exploded higher day after day. I learned a great deal during that bull run.
       
      Here is a picture of a younger me (with more hair) in my trading pit on the CBOE.
       

       
      Soon after I became a trader myself, the Nasdaq fell apart. The dot-com bubble burst, and valuations were reset for virtually the entire market. I learned even more during those bearish years than during the bull market years! Certainly I learned about catching falling knives in a bear market.
       
      And one rule that I took away from the bear years is about stocks that have taken a big dive on earnings.

      The old trading rule that was hammered into my brain by my two trading legend mentors was this:

      If a stock takes a big fall, whether it’s on earnings or some other news event, you MUST wait at least three trading days before even thinking about putting on a bullish position.

      The rationale behind The Three-Day Rule is that if a large hedge fund or institution owns millions of shares of a stock, it won’t be able to sell out of its entire position in a day or two without causing the stock to fall.

      My LinkedIn (LNKD) Example

      Instead, the institution will parcel out its sales over a couple of days, so they don’t depress the stock and can sell at better prices. For example, let’s take a look at LinkedIn, which fell from 192 to 108 in one day on a disappointing earnings release. That was a staggering fall! The next day, the downgrades came pouring in from the brokerage houses (thanks for the downgrades after the fall!).

      Based on the three-day trading rule, I wouldn’t have considered adding a bullish position on Friday, February 5, Monday, February 8 or Tuesday, February 9. But on Wednesday, February 10, according to the rule, I could begin to think about adding a bullish position.

      Here were LNKD’s closing prices on the day of its earnings report and the following days:
       


      As you can see, there remained selling pressure on LNKD in the three days after the big drop. Then, slowly but surely, the stock stabilized, and buyers began to take over.

      I do want to warn, if you follow the three day rule I am sure you are going to miss some stock rebounds. This isn’t a rule that works 100% of the time. However, it has been my experience that more times than not it takes time for stocks to be sold out by institutions, before rebounding.

      However, if you can’t waitto play a bounce you could sell puts to get bullish exposure. This is an options strategy that is often used by traders who are willing to enter a long stock position in a stock at a lower price than the stock is currently trading at.

      Or longer term, an options trader could buy LEAPS (Long-term Equity AnticiPation Securities) which are options with expiration dates that are longer than one year. The advantage to this strategy is that it gives the holder of the LEAP option a great deal of time for the stock to recover and before the option expires.

      Your guide to successful options trading,
      Jacob Mintz

      Jacob is a professional options trader and editor of Cabot Options Trader. He is also the founder of OptionsAce.com, an options mentoring program for novice to experienced traders. Using his proprietary options scans, Jacob creates and manages positions in equities based on risk/reward and volatility expectations. Jacob developed his proprietary risk management system during his years as an options market maker on the Chicago Board of Options Exchange and at a top tier options trading company from 1999 - 2012. You can follow Jacob on Twitter.
    • By Ophir Gottlieb
      The news was three-fold fold: 

      (1) The Board of Directors has named Nikesh Arora as its new chief executive officer and chairman of the Board of Directors, effective June 6, 2018. He succeeds Mark McLaughlin, who is transitioning to the role of vice chairman of the Board for Palo Alto Networks. 

      Nikesh Arora was the president and chief operating officer at SoftBank, but he is most famously known as the the chief business officer at Google where he took the search business from $2 billion in revenues to over $60 billion in revenues. 

      (2) The company pre-announced that in the fiscal third quarter, total revenue grew 31% percent year over year to $567.1 million, product revenue grew 31 percent year over year to $215.2 million, and billings grew 33 percent year over year to $721.0 million. 

      This $567.1 million number is a whopping earnings beat, where analyst expectations were $545.68 million and in a range of [$540 million, $556.4 million]. The CFO went on to say that "[w]e had a strong fiscal third quarter 2018 and will be reporting top line and bottom line results above all our third quarter guided ranges." 

      (3) Palo Alto Networks will host a conference call for analysts and investors to discuss its fiscal third quarter 2018 results and outlook for its fiscal fourth quarter and full fiscal year 2018 on Monday, June 4th before the market opens. 

      It's that last little bit that changed everything for option traders. PANW burying its news in a late Friday press release leaves the option holders with a coin flip -- not a well measured probability bet. 

      PREFACE 
      On 4-27-2018, we published the dossier Applying The New Standard of Repeating Momentum in Palo Alto Networks Inc. 

      In that dossier we noted that "We have empirically and explicitly demonstrated the the repeating pattern of bullish momentum right before earnings. [Further we find] in Palo Alto Networks Inc (NYSE:PANW) exactly the two-tiered pattern we researched again -- stocks that have pre-earnings momentum, and ones with a recent history of large beats that push this momentum into the next quarter." 

      These were the results over the last one-year in Palo Alto Networks of owning a 40 delta (out of the money) call 6-days pre-earnings and selling the call before the earnings announcement. Since PANW reports after the market closes, this test looks at holding the call right until the end of that trading day, and then selling before the announcement. 
       
      PANW: Long 40 Delta Call   % Wins: 100%   Wins: 4   Losses: 0   % Return:  175% 
      Tap Here to See the Back-test
      But all of those results were predicated on avoiding the earnings release and we noted that the back-tested looked at a trade that closes before earnings, so this trade does not make a bet on the earnings result. 

      With the extremely odd news, released at an extremely odd time, this is no longer the case. Earnings be released before the market opens, and will not give option traders the ability to exit any option positions before the earnings event occurs. 

      WHAT HAPPENED 
      In over two decades of option trading and as an option market maker on the exchange floors, I cannot recall a single time when a company announced a new CEO, an earnings beat (but with partial numbers), and then announced earnings on the same day as planned but moved the time from after the market to before the market all at once. 

      Usually when companies pre-release, it's very early -- like Micron did about 6-weeks before earnings in the last couple of weeks. 

      This is simply a case of terrible luck. Now, for anyone with an option position in PANW that intended to avoid the risk of the actual earnings news, we are left with exactly the opposite. Any position now has become a straight down the middle earnings bet - the kind most traders try to avoid at all costs. 

      But, this is it, there is no changing it now. For those that are long calls in the weekly options, the only hope to turn a profit on that position now is for a large earnings move up for the stock. The hope is that the pre-announcement will be backed by even better EPS and guidance news and that the introduction of a Silicon Valley super star as CEO drives the stock higher. 

      But, make no mistake, PANW burying its news in a late Friday press release leaves the option holders with a coin flip -- not a well measured probability bet. 

      Tap Here to See the Tools at Work 

      Risk Disclosure 
      You should read the Characteristics and Risks of Standardized Options. 

      Past performance is not an indication of future results. 

      Ophir Gottlieb is the CEO & Co-founder of Capital Market Laboratories. Mr Gottlieb’s learning background stems from his graduate work in mathematics and measure theory at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by Yahoo! Finance, CNNMoney, MarketWatch, Business Insider, Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire, Barron’s, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television. He created and authored what was believed to be the most heavily followed option trading blog in the world for three-years.This article is used here with permission and originally appeared here.
    • By Kim
      However, not all stocks are suitable for that strategy. Some stocks experience consistent pattern of losses when buying premium before earnings. For those stocks we are using some alternative strategies like calendars.
       
      In one of my previous articles I described a study done by tastytrade, claiming that buying premium before earnings does not work. Let's leave aside the fact that the study was severely flawed and skewed by buying "future ATM straddle" which simply doesn't make sense (see the article for full details). Today I want to talk about the stocks they used in the study: TSLA, LNKD, NFLX, AAPL, GOOG.
       
      Those stocks are among the worst candidates for a straddle option strategy. In fact, they are so bad that they became our best candidates for a calendar spread strategy (which is basically the opposite of a straddle strategy). Here are our results from trading those stocks in the recent cycles:
      TSLA: +28%, +31%, +37%, +26%, +26%, +23% LNKD: +30%, +5%, +40%, +33% NFLX: +10%, +20%, +30%, +16%, +30%, +32%, +18% GOOG: +33%, +33%, +50%, -7%, +26%  
      You read this right: 21 winners, only one small loser.
       
      This cycle was no exception: all four trades were winners, with average gain of 25.2%.
       
      I'm not sure if tastytrade used those stocks on purpose to reach the conclusion they wanted to reach, but the fact remains. To do a reliable study, it is not enough to take a random list of stocks and reach a conclusion that a strategy doesn't work.
       
      At SteadyOptions we spend hundreds of hours of backtesting to find the best parameters for our trades:
      Which strategy is suitable for which stocks? When is the optimal time to enter? How to manage the position? When to take profits?  
      The results speak for themselves. We booked 147% ROI in 2014 and 32% ROI so far in 2015. All results are based on real trades, not some kind of hypothetical or backtested random study.
       
      Related Articles:
      How We Trade Straddle Option Strategy
      How We Trade Calendar Spreads
      Buying Premium Prior to Earnings
      Can We Profit From Volatility Expansion into Earnings
      Long Straddle: A Guaranteed Win?
      Why We Sell Our Straddles Before Earnings
      The Less Risky Way To Trade TSLA
       
      If you want to learn more how to use our profitable strategies and increase your odds:
       
      Start Your Free Trial
    • By Kim
      The problem is you are not the only one knowing that earnings are coming. Everyone knows that some stocks move a lot after earnings, and everyone bids those options. Following the laws of supply and demand, those options become very expensive before earnings. The IV (Implied Volatility) jumps to the roof. The next day the IV crashes to the normal levels and the options trade much cheaper.
       
      Over time the options tend to overprice the potential move. Those options experience huge volatility drop the day after the earnings are announced. In many cases, this drop erases most of the gains, even if the stock had a substantial move. In order to profit from the trade when you hold through earnings, you need the stock not only to move, but to move more than the options "predicted". If they don't, the IV collapse will cause significant losses.
       
      However, there are always exceptions. Stocks like NFLX, AMZN, GOOG tend on average to move more than the options imply before earnings. It doesn't happen every cycle. Few cycles ago NFLX options implied 13% move while the stock moved "only" 8%. A straddle held through earnings would lose 32%. A strangle would lose even more. But on average, NFLX options move more than expected most of the time, unlike most other stocks.
       
      NFLX reported earnings on Monday October 17. The options prices as indicated by a weekly straddle "predicted" ~$10 (or 10%) move. The $100 calls were trading at $5 and the puts are trading at $5. This tells us that the market makers are expecting a 10% range in the stock post earnings. In reality, the stock moved $19. Whoever bought the straddle could book a solid 90% gain.
       
      Implied Volatility collapsed from 130% to 36%. Many options "gurus" advocate selling options on high flying stocks like NFLX or AMZN, based "high IV percentile" and predicted volatility collapse. However, looking at history of NFLX post-earnings moves, this doesn't seem like a smart move.
       

       
      As you can see from the table (courtesy of optionslam.com), NFLX moved more than expected in 7 out of 10 last cycles. For this particular stock, options sellers definitely don't have an edge, despite volatility collapse. If the stock moves more than "expected", volatility collapse is not enough to make options sellers profitable.
       
      Generally speaking, I'm not against selling options before earnings - on the contrary. For many stocks, options consistently overestimate the expected move, and for those stocks, this strategy might have an edge (assuming proper position sizing). But NFLX is one of the worst stocks to use for this strategy, considering its earnings history.
       
      Related articles
      Why We Sell Our Straddles Before Earnings Why We Sell Our Calendars Before Earnings How NOT To Trade NFLX Earnings The Less Risky Way To Trade TSLA  
      If you want to learn how to trade earnings the right way (we just booked 26% gain in NFLX pre-earnings trade):
       
      Start Your Free Trial
       
       
    • By Kim
      First of all, as a general comment, there is no such thing as guaranteed returns in the stock market. If there was, everyone who is trading the stock market would be a millionaire.
       
      The proposed trade is called a straddle option. 
       
      A straddle option strategy is vega positive, gamma positive and theta negative trade. That means that all other factors equal, the option straddle will lose money every day due to the time decay, and the loss will accelerate as we get closer to expiration. For the straddle to make money, one of the two things (or both) has to happen: 

      1. The stock has to move (no matter which direction).
      2. The IV (Implied Volatility) has to increase.  
       
      In simple terms, Implied Volatility is the amount of stock price fluctuations. Being on the right side of implied volatility changes can enhance the chances of success. 
       
      The problem with the proposed setup is that you are not the only one who knows about the event - it’s a public knowledge, so market participants bid the options prices in anticipation of the event, driving IV to higher than usual levels. After the event the IV usually collapses. If the stock moves more than “implied” by the straddle price, then the straddle will be a winner. BUT more often than not, the options prices overprice the potential move, and when the stock moves less than expected, collapsed IV will make the straddle a loser.
       
      Example:
       
      NFLX was scheduled to report earnings on October 15, 2015. The stock was trading around $110, and 110 straddle around 15.50. This price "implied" $15.50 move. The following image presents the P/L chart of the trade:
       

      As we can see, the IV is around 240% for those options, reflecting the upcoming event.
       
      Fast forward 24 hours: the stock moved $9 which is a substantial move, but less than "implied" by the options prices. This is the P/L chart:
       

       
      As we can see, IV collapsed to ~85%, and the trade has lost 42%.
       
      At SteadyOptions, we trade straddles in a different way. We usually buy a straddle around 7-10 days before the event and sell it 1-2 days before the event when IV peaks. This setup can benefit from the stock moving and/or IV increase.
       
      Related articles:
      How We Trade Straddle Option Strategy
      Buying Premium Prior to Earnings
      Can We Profit From Volatility Expansion into Earnings
      Understanding Implied Volatility
      How We Made 23% On $QIHU Straddle In 4 Hours
       
      Want to learn more?
       
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