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Jeff - EarningsViz

Introducing EarningsViz: Earnings Trades with an Edge

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I would like to introduce earningsviz.com, an options website focused on earnings trades. The thesis behind the website is simple: tail-end risk is mispriced around earnings events; by creating a simple and easy way to visualize this mispricing via analyzing option prices, it allows traders to pick the best strike prices and strategies to enter an earnings trade.

 

This is achieved by comparing a historical distribution of changes in the stock after earnings against the implied moves of the stock calculated via tight vertical spreads. This comparison yields an edge value that demonstrates whether a stock is fairy valued, or more favorable for option buyers/sellers. A more detailed explanation of the methodology can be found here.

 

Currently, EarningsViz is in a beta mode so all the information is available for free - the companies listed are all reporting next week (updated every Thursday/Friday). In the future, there will be a subscription required for accessing the information, and I plan on giving SteadyOptions users a discount.

Also, I plan on adding strategies and trades for pre and post earnings soon.

 

I am open to feedback/questions on the site as well as features you would like to see added, so let me know what you think!

 

 

 

 

 

 

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Good luck, it's not easy to launch a web app to be profitable when selling to retail investors.

For the quant theory, you rely on Breeden and Litzenberger theorem which basically says that if you can observe a continuum of option prices, then you can calculate the risk neutral cumulative distribution (the probability like you do) or even the implied risk-neutral density. For the probability you just need to have the first order derivative of the call price with respect to the strike like formula (2) in https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr677.pdf

So your evZeroVal could be directly calculated with diff option price / diff strikes if you ignore the interest rates.

If you search on Breeden and Litzenberger, you will find plenty of litterature.

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6 minutes ago, Djtux said:

Good luck, it's not easy to launch a web app to be profitable when selling to retail investors.

For the quant theory, you rely on Breeden and Litzenberger theorem which basically says that if you can observe a continuum of option prices, then you can calculate the risk neutral cumulative distribution (the probability like you do) or even the implied risk-neutral density. For the probability you just need to have the first order derivative of the call price with respect to the strike like formula (2) in https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr677.pdf

So your evZeroVal could be directly calculated with diff option price / diff strikes if you ignore the interest rates.

If you search on Breeden and Litzenberger, you will find plenty of litterature.

Thanks for that - I'll look into the theorem and compare it my current calculations based on vertical spreads.

I believe that retail traders will be willing to pay for services that provide value - I believe that EarningsViz data can help them to make back the subscription fee in a few trades. That being said, I do plan on incorporating more strategies in the future in order to appeal to more traders.

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Just an update on the project - in the future, I'm planning on adding not only pre-earnings trades, but post earnings trades (comparing the implied volatility on options after "all information is known" to the historical volatility after earnings reports.

Currently, the site is still free so you should feel free to take a look and hopefully benefit from its data - feel free to reach out to jeff@earningsviz.com if you have any comments or questions.

When more features are added in the future, I plan on making the site subscription based - however, I may give a discount or free access to SteadyOptions subscribers. 

 

 

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Also, if you could share trades for the upcoming earnings with the results I think that will help us visually see with data that is working and why you have picked "edge" scored higher (selling) vs lower (buying especially trades on strategies that are Butterfly, Strangles etc.

Thanks

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19 hours ago, kris00l said:

Also, if you could share trades for the upcoming earnings with the results I think that will help us visually see with data that is working and why you have picked "edge" scored higher (selling) vs lower (buying especially trades on strategies that are Butterfly, Strangles etc.

Thanks

Thanks for the suggestion! I'll post on this thread when I implement it.

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@Jeff - EarningsViz, I have a question. On your website, main page, in the SPLK example, how can the 'Actual' move for the 125-124 spread be different from the other two just above it? Should it not also be 0.3929 - the actual stock price move on earnings doesn't care what delta options spread you sold.

Pls see attached screenshot.

SPLK.thumb.PNG.ab0a68c44163afb2f5f7fe74e6aec7ea.PNG

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17 hours ago, zxcv64 said:

@Jeff - EarningsViz, I have a question. On your website, main page, in the SPLK example, how can the 'Actual' move for the 125-124 spread be different from the other two just above it? Should it not also be 0.3929 - the actual stock price move on earnings doesn't care what delta options spread you sold.

Pls see attached screenshot.

SPLK.thumb.PNG.ab0a68c44163afb2f5f7fe74e6aec7ea.PNG

The "actual" refers to the actual number of times that SPLK has moved more than -3.55% during past earnings events. There were 28 total earnings events tracked for SPLK and 6 of those times SPLK fell more than -3.55%  (6/28 = 0.214)

 

Let me know if that makes sense!

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  • Similar Content

    • 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 matters 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:
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    • By Kim
      Here is how their methodology works:
       
      In theory, if you knew exactly what price a stock would be immediately before earnings, you could purchase the corresponding straddle a number of days beforehand. To test this, we looked at the past 4 earnings cycles in 5 different stocks. We recorded the closing price of each stock immediately before the earnings announcement. We then went back 14 days and purchased the straddle using the strikes recorded on the close prior to earnings. We closed those positions immediately before earnings were to be reported.


       

       
      Study Parameters:


      TSLA, LNKD, NFLX, AAPL, GOOG Past 4 earnings cycles 14 days prior to earnings - purchased future ATM straddle Sold positions on the close before earnings  
      The results:
       
      Future ATM straddle produced average ROC of -19%.
       
      As an example:
       
      In the previous cycle, TSLA was trading around $219 two weeks before earnings. The stock closed around $201 a day before earnings. According to tastytrade methodology, they would buy the 200 straddle 2 weeks before earnings. They claim that this is the best case scenario for buying pre-earnings straddles.

      My Rebuttal 
       
      Wait a minute.. This is a straddle, not a calendar. For a calendar, the stock has to trade as close to the strike as possible to realize the maximum gain. For a straddle, it's exactly the opposite:
       

       
      When you buy a straddle, you want the stock to move away from your strike, not towards the strike. You LOSE the maximum amount of money if the stock moves to the strike.
       
      In case of TSLA, if you wanted to trade pre-earnings straddle 2 weeks before earnings when the stock was at $219, you would purchase the 220 straddle, not 200 straddle. If you do that, you start delta neutral and have some gamma gains when the stock moves to $200. But if you start with 200 straddle, your initial setup is delta positive, while you know that the stock will move against you. 
       
      It still does not guarantee that the straddle will be profitable. You need to select the best timing (usually 5-7 days, not 14 days) and select the stocks carefully (some stocks are better candidates than others). But using tastytrade methodology would GUARANTEE that the strategy will lose money 90% of the time. It almost feels like they deliberately used those parameters to reach the conclusion they wanted.
       
      As a side note, the five stocks they selected for the study are among the worst possible candidates for this strategy. It almost feels like they selected the worst possible parameters in terms of strike, timing and stocks, in order to reach the conclusion they wanted to reach.
       
      At SteadyOptions, buying pre-earnings straddles is one of our key strategies. It works very well for us. Check out our performance page for full results. As you can see from our results, "Buying Premium Prior To Earnings" is still alive and kicking. Not exactly "Nail In The Coffin".
       
      Comment: the segment has been removed from tastytrade website, which shows that they realized how absurd it was. We linked to the YouTube video which is still there.
       
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      And much more. But overall, this strategy has been working very well for us. If you want to learn more how to use it (and many other profitable strategies):
       
      Start Your Free Trial
       
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    • By Jacob Mintz
      (My full options education article on why buy-writes have the exact same risk/reward as selling naked puts is at the end of this article.)

      The second reason I closed the position was there was a chance that SE would report earnings during the May expiration cycle. That would potentially bring another layer of risk to our May buy-write position. As you can see in the graphic below my options trading tool is estimating earnings will be reported the Wednesday before expiration, which would certainly keep the value of the buy-write high through earnings.



      Another way I can determine when a company is due to report earnings is by comparing the volatility of the options each month. The volatility/price of options in the reporting month is higher than the months before and after earnings. Here is an example using Zendesk (ZEN), which will report earnings tonight:

       

      What you can see in this graphic is that with the options expiring May 17 option volatility is 56.17, way more expensive than the June 21 option volatility, which is 41.77. In essence, the price of options/volatility is telling you that ZEN’s earnings are in the May option expiration.

      Now let’s circle back to SE. Yesterday, the May option volatility in SE was significantly more expensive than June. And because of that I assumed that SE would report earnings in May.

      However, based on a trade today, and how the options market is reacting to this trade, I now believe that SE’s earnings will come during the June expiration cycle, not May. First, here is the trade:

      Seller of 7,500 Sea (SE) May 25 Calls for $1 – Stock at 25

      Buyer of 7,500 Sea (SE) June 25 Calls for $1.90 – Stock at 25

      This trade, and the subsequent volatility shift, would lead me to believe earnings are now in June. As the graphic below shows, the May volatility is down 6.7 points and now below the June volatility. Yesterday the May volatility was approximately four points higher than June … and today June is now 2.5 points higher than May (48.8 vs. 46.19).

       

      The earnings date for SE is still not confirmed. However, by paying attention to the price of options/volatility you can get a good read on when the options market is predicting a company will report.
       
      Below is an options education article I wrote several years ago demonstrating that while Covered Calls/Buy-writes are considered a safe trade, and Naked Put Sales are perceived to have high risk, at the end of the day they have the EXACT same risk/reward. 

      Buy-Write vs. Naked Put Sale

      Buy-writes, also known as covered calls, are one of the general public’s most popular options trading strategies. Selling naked puts (the sale of a put in an stock or index without a stock position), on the other hand, is feared by the general public as it’s considered to have much greater risk than a traditional buy-write. But when you break down the profit and loss potential of the two strategies, you can see that they’re identical.

      Let’s start by looking at a buy-write/covered call:   

      A covered call is a strategy in which the trader holds a long position in a stock and writes (sells) a call option on the same stock in an attempt to generate income. Because the trader sold a call against his stock position, his upside is now limited.

      For example, let’s say you own 100 shares of Alcoa (AA), which is currently trading at 13.99. You then theoretically sell one AA July 14 Call (expiring 7/19/2014) for $0.51 for each of your 100 shares.

      Let’s take a look at a few scenarios for this trade:
      In this scenario, AA shares trade flat for the next month and the stock stays below the 14-strike price. At this point, the options you sold will expire worthless, and you will have collected your full premium of $0.51 per share ($51). Thus you will have created a yield of 3.78% in one month’s time.
        In this scenario, AA shares fall to 13.48. At this point, the options you sold will expire worthless and you will have collected your full premium of $0.51 per share ($51). However, your 100 shares of AA will have lost $51 of value. Thus, you are breakeven on the trade. At this time, you could simply sell the next month’s calls against your stock position.
        In this scenario, AA shares fall to 13. Once again, the options you sold will expire worthless and you will have collected your full premium of $0.51 (or $51). However, your shares of AA will have lost $99 of value, leaving you down $48 on the trade. At this time, you could simply sell the next month’s calls against your stock or exit the entire position by selling your stock.
        In this scenario, AA shares rise above 14. At this point, the owner of the 14 calls will exercise his right to buy the stock from you. This will leave you with no position. However, you have collected your $0.51 (or $51) and made $0.01 on the stock position.
      Here is the profit and loss graph of this trade:




      Now let’s take a look at the scenarios of selling a Naked Put in the same stock. (Remember, selling naked puts is the sale of a put in a stock or index without a stock position.) With stock AA trading at 13.99, we could sell the July 14 Puts (expiring 7/19/2014) for $0.51.

      Let’s take a look at a few scenarios for this trade:
      In this scenario, AA shares trade flat for the next month and the stock stays below the 14-strike price. At this point, the options you sold will expire in the money, and you will have collected your premium of $0.51 per share ($51). Now you will be long the stock, but will have created a yield of 3.78% in one month’s time. At this time, you could simply sell the next month’s calls against your stock position.
        In this scenario, AA shares fall to 13.48. At this point, the puts you sold will expire in the money.  Thus you will buy the stock at 14.  However, since you collected your full premium of $0.51 per share ($51) this makes up for the loss on the stock. Thus, you are breakeven on the trade. At this time, you could simply sell the next month’s calls (switching to a buy-write now that you own shares) against your stock position.
        In this scenario, AA shares fall to 13. At this point, your puts are in the money so you will be forced to buy the stock at 14. You will have collected your full premium of $0.51 (or $51). However, your shares of AA will have lost $99 of value, making you down $48 on the trade. At this time, you could simply sell the next month’s calls against your stock or exit the entire position by selling your stock.
        In this scenario, AA shares rise above 14. At this point, the puts you sold will expire worthless and you will have collected your full premium of $0.51, or a yield of 3.78%.
      Here is the profit and loss graph of this trade:



       
      So what jumps out about these two charts? They are absolutely identical! The most you can make is the same, and the most you can lose is the same.

      We can go through this exercise hundreds of times but each time the profit and loss graphs will be identical. Thus, executing a buy-write is “synthetically” identical to selling a naked put.

      Jacob Mintz 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 cwelsh
      In fact, it wouldn’t surprise me if those articles weren’t algorithmically generated based on whatever AP news story is trending.

      Just looking at today’s news makes the point:

      Fox Business has declared that Twitter’s profits are up because Trump demanded fairer social media.
      I’m quite certain that Donald Trump’s call for a fairer social media had very little to do with the bump in Twitter’s stock price.  But saying “user numbers are up, and profits are up” doesn’t generate as much click bait as anything involving Donald Trump – from readers on both sides of the US political aisle.  Anyone who regularly follows financial headlines knows of just how laughable a lot of the supposed claimed correlations are.

      Analysts grasping at straws trying to explain market movements becomes particularly laughable when looking at the options markets.  What is clear reading option market news pieces is that writers understand very little about options or the reasons option traders enter trades.  For some reason, most of the media assumes all option trades are bets on prices moving over a period of time.  If traders buy puts, financial writers think the stock price is going down.  If traders buy calls, those same writers think the pricesare going up.  It’s a very limited analysis.

      In actuality, many option traders, Steady Option traders included, trade options to make money from volatility swings, to hedge existing positions, to help exit large stock positions, to help enter into long/short positions (a form of a hedged position), and a host of other reasons.   It is impossible to look at a ticker and see “500 contracts of the 150 puts on stock ABC were bought” and conclude the reason for the purchase was because investors are betting on a price decline.

      A recent article on TSLA indicates this exact point.

      The author saw that “investors bought 5,000 weekly puts expiring April 26 with a strike price of $200…and 5,000 monthly contracts expiring in late June.”  The author concluded this was a “type of crash protection” against coming earnings.  This analysis is possibly correct, but more likely than not wholly incorrect.  On this same day, there were also the same amount of the May monthly 200 put sold.  In other words, it looks like that trader entered into:
      BTO April 26 200 Put STO May 17 200 Put Which all Steady Option members should recognize as an earnings diagonal trade.  Given that earnings for TSLA are approaching (April 24), to me, it seems like this is even more likely of a possible trade.  Further, I would conclude this was an earnings diagonal trade because it looks like the position was closed today (due to option volumes on the same positions).  Reporters don’t appear to consider this point.

      Just as commonly, if there’s not a “matching” trade to see a diagonal or straddle setup, is the fact that most very large option positions are taken for hedging reasons or to assist in the liquidation of large positions.  For example, if Joe Smith trader owned AAPL stock bought 5 years ago, Mr. Smith has well over one hundred percent gains.  If Mr. Smith still has faith in AAPL, he may not want to sell (or incur capital gains taxes), but he also doesn’t want to keep that much risk on the table.  So,he buys the June 2020 150 puts for $3.00.  This means he’s locking in a 50% gain for well over a year for only 1.5% of the current price.  This is not a “bet” that the stock price is going to decline.  It’s locking in gains.  If an institution owns 10m shares of AAPL, it probably has a duty to enter into a hedge such as this.  There is no way to view a single options trade and make a prediction on “market sentiment.” 

      So why should we even read options news and reporting?  Well I do it to see potential options trades.  Higher volume trades typically mean more liquidity and tighter spreads (though not always), which means I can option trade for “cheaper.” High volume announcements also get me to look at just how that trade might have been structured, thereby giving an idea for other trades.  Just because a reporter is ignorant as to the reason for a trade does not mean an options trader cannot pull out worthwhile information for their own uses – while laughing at the reporter’s lack of option knowledge and hopefully making money in the process.

      Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Strategy and and Lorintine CapitalBlog.
       
    • By james_km69
      Hi , I was wondering if I buy 10 or 20 options contracts for 1B + cap stocks like Fedex, Intel or  Kroger .....    would i be able to sell them easily the next day?
      For instance,  If I buy 20 options of LZB  on a day that volume is 1 million +,  can I sell all of them the next day? or it won't be enough buyers to exit all my positions?
      New to options, so please let me know
      Thanks,
      James

    • 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 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.
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