popsovy 0 Report post Posted December 24, 2020 I am trying to under the rationale for option premiums in two situations where earnings were announced (to be announced) after hours, after option expiration. Case 1 - high option premiums. NKE was trading between $136 and $141 on Friday 12/18/20. The company had earnings announcement scheduled for that Friday 12/18/20, AFTER hours. The near OTM calls and puts with expiration on that Friday (not next Friday) traded around $3.00 with an hour left in the trading session. Case 2- low option premiums. CCL is trading around $20 today, Thursday, 12/24/20. The company has an earnings announcement tomorrow 12/25/20 "before market", but the market is closed tomorrow (Xmas day). The near OTM calls and puts with expiration of today are trading around $0.02 with 5 hours left in the trading session. So, in both cases, the earnings announcement was (is) to happen after the market close for the current expiration week, but in one case option premiums were high and in the other case option premiums are low. The average implied volatility for both stocks is in the same ballpark as of recent. Was that case with NKE an abnormality? Or, is there a rationale for high option premiums with so little time left till expiration in that case? Share this post Link to post Share on other sites
Yowster 8,001 Report post Posted December 24, 2020 18 minutes ago, popsovy said: I am trying to under the rationale for option premiums in two situations where earnings were announced (to be announced) after hours, after option expiration. Case 1 - high option premiums. NKE was trading between $136 and $141 on Friday 12/18/20. The company had earnings announcement scheduled for that Friday 12/18/20, AFTER hours. The near OTM calls and puts with expiration on that Friday (not next Friday) traded around $3.00 with an hour left in the trading session. Case 2- low option premiums. CCL is trading around $20 today, Thursday, 12/24/20. The company has an earnings announcement tomorrow 12/25/20 "before market", but the market is closed tomorrow (Xmas day). The near OTM calls and puts with expiration of today are trading around $0.02 with 5 hours left in the trading session. So, in both cases, the earnings announcement was (is) to happen after the market close for the current expiration week, but in one case option premiums were high and in the other case option premiums are low. The average implied volatility for both stocks is in the same ballpark as of recent. Was that case with NKE an abnormality? Or, is there a rationale for high option premiums with so little time left till expiration in that case? CCL earnings date is not confirmed, and it certainly won't be on Christmas day - so the Dec24 options will not encompass earnings - hence the lack of premium. NKE was a unique case, as I don't recall any prior Friday after close earnings announcements - certainly not one for a company as large as NKE. Options expire and go through assignment on Saturday, so any stock price changes that occur after hours on Friday would have to be accounted for - hence the large amount of premium. Think of it this way with NKE - if there was little time premium left on Friday at the end of the day then you could have bought an ATM straddle for a very low price and stood a good change of making a good gain come Monday morning (you would have been assigned but with a significant stock price move you'd be at a profit when you close the position on Monday morning). Share this post Link to post Share on other sites
popsovy 0 Report post Posted December 24, 2020 I guess I don't understand the settlement process. In case of NKE, let's say I bought a strangle 1 hour before close on 12/18/20, and both options were OTM at the close. What are the mechanics of what happens next? According to "investopedia", for American-style options: Quote The settlement price is the official closing price for the expiration period, establishing which options are in the money and subject to auto-exercise. Any option that's in the money by one cent or more on the expiration date is automatically exercised unless the option owner specifically requests his/her broker not to exercise. The settlement price for the underlying asset (stock, ETF, or index) with American-style options is the regular closing price or the last trade before the market closes on the third Friday. After-hours trades do not count when determining the settlement price. Assuming this quote is accurate, what happens to my OTM long call and OTM long put during the Saturday settlement? Shouldn't both options be deemed worthless since the Friday close was the settlement price, or does the after-hours price movement or Monday open come into play somehow? Thank you for your help! Share this post Link to post Share on other sites
Yowster 8,001 Report post Posted December 24, 2020 30 minutes ago, popsovy said: Assuming this quote is accurate, what happens to my OTM long call and OTM long put during the Saturday settlement? Shouldn't both options be deemed worthless since the Friday close was the settlement price, or does the after-hours price movement or Monday open come into play somehow? Thank you for your help! Read the after-hours activity section in this nasdaq.com article: https://www.nasdaq.com/articles/automatic-exercise-after-hours-risk-and-other-options-expiration-issues-2010-11-18 Key to the quote you posted is the phrase "auto-exercise", options in the money at the closing stock price are automatically exercised. Howerver, if the stock price has a big move after hours then the holder of the long options can choose to exericse them (remember that assignment does not occur until the weekend) although that exercise is not necessarily automatic based on market rules (with some brokers it very well may be automatic). For example with NKE, Friday's closing price at 4:00 was a little over $137, but when earnings came out after the market closed the after-hours trading had the stock price trading around $145. So, say somebody owned at 140 strike Dec18 call - that strike was OTM as of Friday close so the exercise is not automatic, but since that strike was well ITM based on the after hours trading the owner of that option would certainly call his broker to exercise them (the owner would be stupid not to exercise in this case). If you were long NKE calls in this scenario, you'd call your broker to make sure they would be excercised, if you were short NKE calls in this scenario you have no control over assignment but more than likely you would be assingned. Share this post Link to post Share on other sites
Kim 7,500 Report post Posted December 24, 2020 And if you compare options prices for NKE during usual week (Dec.17 at close): with prices on Dec.18 at close: you will see that after hours move does count. When earnings were after hours on Friday, even options $3-5 OTM still had decent value. Share this post Link to post Share on other sites
