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Found 31 results

  1. Jacob Mintz

    How Earnings Impact Options Prices

    (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.
  2. 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
  3. 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?
  4. 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
  5. 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
  6. 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.
  7. Ophir Gottlieb

    PANW Broke the Golden Rule

    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.
  8. 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
  9. 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 2 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. But 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. Of course the devil is in the details. There are many moving parts to this strategy: When to enter? Which stocks to use? How to manage the position? When to take profits? 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 Related Articles: How We Trade Straddle Option Strategy Can We Profit From Volatility Expansion into Earnings Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings Long Straddle: A Guaranteed Win? How We Made 23% On QIHU Straddle In 4 Hours
  10. 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? Start Your Free Trial
  11. Trade Explanation: For the Volatility Advisory in NFLX, we are selling the Apr 427.5 puts and 520 calls and buy the Apr 425 puts and 522.5 calls for a net credit of $0.91 to open. Underlying Price: $474.22 Price Action: We are selling this $2.5-wide Iron Condor in the online streaming company for a credit of $0.91. For an Iron Condor trade, we sell an out-of-the-money Call Vertical (520/522.5) and Put Vertical (427.5/425) simultaneously. The company has earnings after the close and the option markets are pricing in a move of 8-9%. We expect the shares to move after the report but are giving ourselves a nice range of $92.5 between the short strikes. We need the shares to continue to trade between our break-even levels of $426.59 on the downside and $520.91 on the upside. The following was described as a rationale for the trade: Volatility: Volatility is elevated in the Apr options which makes this trade attractive. The IV percentile rank is elevated at 73% also which also gives us a good opportunity to sell this Iron Condor. We expect volatility to fall sharply after earnings which will contract the value of this short-term neutral position. Probability: There is an 80% probability that NFLX shares will be below the $520 level and a 80% probability that it will be above the $427.5 level at Apr expiration. This trade offers a good Risk/Reward scenario with the amount of credit collected vs. the probability numbers for this position. Trade Duration: We have 2 days to Apr expiration in this position. This is a short-term position and time decay will increase quickly due to the time frame and the earnings report. Logic: We want to take advantage of the increased volatility in our option by initiating this earnings play. Our short verticals are outside of the anticipated one standard deviation move that the options are pricing in so our probabilities are positive. The shares will hopefully remain between our short verticals and we will be aggressive in closing the trade. My comments: It is true that Volatility is elevated in the Apr options, but this is completely normal, considering the upcoming earnings and does NOT make the trade attractive. It is also true that volatility will fall sharply after earnings, but it is not relevant if the stock will be trading above the long strikes. In this case, the trade will still lose 100%. 2 days to Apr expiration makes the trade much more risky because there will be no time to adjust or take any corrective action. "80% probability that NFLX shares will be below the $520 level" means nothing when earnings are involved. The price action will be determined by earnings only, not by options probabilities. "The shares will hopefully remain between our short verticals" - hope is not a strategy. The short strikes are less than 10% from the stock price, which is not far enough, considering NFLX earnings history. Now, I want you to take a look at the last 10 cycles of NFLX post-earnings moves: (This screenshot is taken from OptionSlam.com). Now, I'm asking you this: WHO IN HIS RIGHT MIND WOULD TRADE AN IRON CONDOR WITH SHORT STRIKES LESS THAN 10% FROM THE STOCK, ON A STOCK THAT HAS TENDENCY TO MOVE 15-25% AFTER EARNINGS ON A REGULAR BASIS??? The stock is trading above $530 after hours. If it stays this way tomorrow, this trade will be a 100% loser, and there is NOTHING you can do about it. But frankly, the final result doesn't really matter. To me, this trade is simply insane and shows complete lack of basic options understanding. That said, I'm not completely dismissing trading Iron Condors through earnings. 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. Watch the video: If you want to learn how to trade earnings the right way (we just booked 30% gain in NFLX pre-earnings trade): Start Your Free Trial
  12. The study was done today - here is the link. The parameters of the study: Use AAPL and GMCR as underlying. Buy a ATM straddle option 20 days before earnings. Sell it just before the announcement. The results of the study, based on 48 cycles (2009-2014) AAPL P/L: -$2933 GMCR P/L: -$2070 Based on those results, they declared (once again) that buying a straddle before earnings is a losing strategy. What's wrong with this study? Dismissing the whole strategy based on two stocks is completely wrong. You could say that this strategy does not work for those two stocks. This would be a correct statement. Indeed, we do not use those two stocks for our straddles strategy. From our experience, entering 20 days before earnings is usually not the best time. On average, the ideal time to enter is around 5-10 days before earnings. This when the stocks experience the largest IV spike. But it is also different from stock to stock. The study does not account for gamma scalping. Which means that if the stock moves, you can adjust the strikes of the straddle or buy/sell stock against it. Many times the stock would move back and forward from the strike, allowing you to adjust several times. In addition, the study is probably based on end of day prices, and from our experience, the end of day price on the last day is usually near the day lows, and you have a chance to sell at higher prices earlier. The study completely ignores the straddle prices. We always look at prices before entering and compare them to previous cycles. Entering the right stocks at the right time at the right prices is what gives this strategy an edge. Not selecting random stocks, random timing and ignoring the prices. As a side note, presenting the results as dollar P/L on one contract trade is meaningless. GMCR is trading around $150 today, and pre-earnings straddle options cost is around $1,500. In 2009, the stock was around $30, and pre-earnings straddle cost was around $500. Would you agree that 10% gain (or loss) on $1,500 trade is different than 10% gain (or loss) on $500 trade? The only thing that matters is percentage P/L, not dollar P/L. Presenting dollar P/L could potentially severely skew the study. For example, what if most of the winners were when the stock was at $30-50 but most of the losers when the stock was around $100-150? Tom Sosnoff and Tony Battista conclude the "study" by saying that "if anybody tells you that you should be buying volatility into earnings, they really haven't done their homework. It really doesn't work". At SteadyOptions, buying pre-earnings straddle options is one of our key strategies. Check out our performance page for full results. As you can see from our results, the strategy works very well for us. We don't do studies, we do live trading, and our results are based on hundreds real trades. Of course the devil is in the details. There are many moving parts to this strategy: When to enter? Which stocks to use? How to manage the position? When to take profits? And much more. So we will let tastytrade to do their "studies", and we will continue trading the strategy and make money from it. After all, as one of our members said, someone has to be on the other side of our trades. Actually, I would like to thank tastytrade for continuing providing us fresh supply of sellers for our strategy! If you want to learn more how to use it (and many other profitable strategies): Start Your Free Trial Related Articles: How We Trade Straddle Option Strategy Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings Long Straddle: A Guaranteed Win? How We Made 23% On QIHU Straddle In 4 Hours
  13. Kim

    Betting on AAPL Earnings?

    Given the power of stock options to leverage your investment dollars, you might be tempted to bet on the AAPL earnings report coming out today by buying Apple calls (if you think the stock is going up) or Apple puts (if you want to bet that it will go down). That bet paid off handsomely in July 2016 when Apple reported earnings. The stock rose 6.5% the next day and the value of Apple’s weekly calls increased dramatically. But that’s the exception, not the rule. As I showed in one of my Seeking Alpha articles, buying either puts or calls just before Apple’s earnings report is, on average, a losing proposition. When you look at longer timeframe, AAPL tends to move less than expected. Take a look at the screenshot from optionslam.com, showing the post earnings movement of the stock in the last 10 cycles: The explanation for those numbers is simple. Over time, the options tend to overprice the potential post-earnings move. Those options experience huge volatility drop the day after the earnings are announced. In most cases, this drop erases most of the gains, even if the stock had a substantial move. The last column shows the one day post earnings performance of the weekly straddle. As we can see, it has lost money 8 out of 10 times. Which means that 8 out of 10 times the stock moved less than expected. If I had to choose, I would take the other side of the trade (selling those options). Jeff Augen, a successful options trader and author of six books, agrees: "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: Is Your Risk Worth The Reward? Why We Sell Our Straddles Before Earnings Risk Reward Or Probability Of Success? Whatever You Do, Don't Do This Before Apple's Earnings How NOT To Gamble On AAPL Earnings Want to learn how to trade options in a less risky way? Start Your Free Trial
  14. The reason is simple: 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. Kirk Du Plessis from OptionAlpha seems to agree. He conducted a backtest proving that holding a straddle through earnings is on average a losing proposition. Here are the highlights of his research. Key Points: Often times traders go through cycles where the stock makes incredibly big moves. This encourages traders to buy long straddles heading into earnings; a long call/put at the money assuming that the stock will make a big move so that you can profit from it. However, it is not the case that the stock always consistently moves more than expected in the long term. The market is smart enough to overcorrect and implied volatility always overshoots the expected move, on average. Case Study 1: Apple Did a long straddle every time earnings were present, all the way back to 2007 through now. This is a lot of earnings cycles and a lot of different information for Apple. Since then Apple has had a considerable move, which really challenges the validity of the strategies. We entered a long straddle at the money the day before earnings and took it off the next day. The stock was trading at $90; we bought the 90 put and the 90 call and closed it right after earnings were announced the next morning. Results: A long straddle in Apple for earnings only ended up winning 41.38% of the time. The average return over 10 years was -1.31%. Over the long haul, a long option strategy results in a negative expected return, especially in a stock like Apple. On the opposite end of this trade, if you had done the short straddle instead of buying options, you would have generated at least 60% of the time and expected a positive return. The straddle price before earnings, on average, was $15. The straddle price directly after earnings went down to about $7.95; not a great choice for long-option buyers. Case Study 2: Facebook Entered the same long straddle position, entering right before earnings were announced and exiting again right after earnings were announced. This strategy only won 27% of the time, which is a huge miss for Facebook percentage-wise. These long options strategy simply do not perform as well as we think over time. Results: Had an annual return of 0.70%. Only a couple of months ended up being the determining factor to keep it above board. If you missed a couple of those really big moves or if Facebook moved much higher than expected, then it would have resulted in a much more negative return. On the counter side, if you had traded the short option strategy it would have worked out well, generating a positive expected return. On average, the market priced these straddles at about $5.62 before earnings. After they announced earnings, the straddle pricing went down to $1.78. The key was that the crash in the volatility and the straddle pricing is really why this strategy was a big loser. However, this was a really good winner for option sellers. The average expected move in Facebook was $6.45 and the actual expected move on Facebook was $7.09. Facebook out-performed on average. If you could remove the biggest outlier from 2013, then Facebook under-performs by $6.16. More recently, Facebook has begun to consistently under-perform its expected moves. Case Study 3: Chipotle With Chipotle we used the same strategy as with Apple and Facebook, entering into a long straddle right before earnings and exiting it right after earnings. Results: The overall win rate was 35.48%. The average annual return was -2.59%, losing a significant amount of money in the trade. This again consistently led option sellers to be the beneficiaries of the earnings trade in Chipotle. The average price of the straddle heading into the earnings event was 26.26%. The stock went from the low 60's, all the way up to the 600's and back down to 400 - so the straddles are naturally going to be more pricey. On average the straddle price was 26.26 and after earnings the straddle price was 11.21, collapsing by more than half. There are huge moves in Chipotle, but they do not overshadow what actually happened in the long term. Expected move in Chipotle was 7.01 and the actual move was 5.28 - the market vastly underperformed. Conclusion: After big moves, we start to see expected moves and the stock expands and then smaller moves follow. Generally speaking, when the stock outperforms the expectation the next couple of cycles end up being fairly quiet. If we do find ourselves in a quiet period where the stock has performed really well, we should be careful that it could surprise us shortly. Likewise, if the stock has been really volatile and has outperformed and moved more than expected in the last couple of cycles that means we could potentially be more aggressive as it might underperform heading forward. Generally, there is also a lag time between the market catching up - earnings trades only happen four times a year. The market participants don't get a lot of data throughout the year to make changes to expectations and trading habits. If the stock has a huge move after earnings, more than expected, it might take a cycle or two for the options pricing to catch up and realize the new normal. At the end of the day, realizing how much these numbers gravitate towards what they should be on average, long-term is really powerful. You can listen to the full podcast here. This research confirms what we already knew: 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. Thank you Kirk! The next question is of course: if holding a long straddle through earnings is a losing proposition, why not to take the other side and short those straddles? But lets leave something for the next article.. Related articles: How We Trade Straddle Option Strategy Buying Premium Prior To Earnings - Does It Work? Can We Profit From Volatility Expansion Into Earnings? Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings Selling Strangles Prior To Earnings Straddle Option Overview
  15. So if options are on average overpriced before earnings, why not to sell those options and hold the trade through earnings? There are few ways to sell options before earnings to take advantage of IV crash. One if through an Iron Condor. Many options sites do this strategy on a regular basis, based on high IV rank alone. I described here why selling options based on high IV rank alone might be not a smart move. The article described selling iron Condor on NFLX, based on the very high IV rank of NFLX options before earnings. Unfortunately, NFLX is one of the worst stocks to trade this strategy. While options on average tend to be overpriced before earnings, NFLX is one of the exceptions. In fact, it moves on average more after earnings than the options imply. So there is no statistical edge to sell NFLX options. The opposite is true - there might be a statistical edge to actually buy them and hold through earnings. Another strategy to take advantage of elevated IV is through a calendar spread, where you sell the near term options and buy longer term options. So when you buy options before earnings (via straddle or strangle) you want the stock to move. If it does, the gamma gains will outpace the IV collapse. When you sell options before earnings (through calendar or Iron Condor), you want the stock to stay relatively close to the current price. In the straddle article, I described a TWTR trade from one of the options "gurus" that has lost 55%. The same guru recommended the following calendar spread before TXN earnings: Sell -25 TXN OctWk4 53 Call Buy 25 TXN Nov15 53 Call The rationale of the trade: Over the years, (TXN) has been one of my favorite earnings plays to trade. A very consistent winner, I have almost exclusively used a Neutral Calendar Spread on it, which is a strategy that takes advantage of over-priced options (high Implied Volatility) and time-decay. This strategy works best with stocks that have weekly options, and (TXN) has these available. Historically, (TXN) is just not a very volatile stock. Every rare so often, even when the stock has moved more than expected, the Neutral Calendar Spreads hold up extremely well. Last quarter, the stock had the following price movement after reporting earnings: Jul 23, 2015 49.84 51.26 49.59 50.51 13,271,800 50.17 Jul 22, 2015 48.30 49.64 48.00 49.30 15,381,500 48.97 This trade is priced great, so recommend getting in as soon as possible. 10/10. Fast forward to the next day after earnings: TXN gaped up 10%, and the calendar spread has lost 90%+. So much for "the Neutral Calendar Spreads hold up extremely well." And here lies the problem: even if you have a long term edge (buy straddle on stocks that move more than expected and buy calendar on stocks that move less than expected), from time to time those stocks will not behave "as expected, based on historical data", and the trades will be big losers. When this happens, there is nothing you can do to control the risk and minimize the loss. That said, it doesn't mean you cannot use one of those strategies and hold through earnings, assuming you use the right strategy for the right stocks. But you need to assume a 100% loss right front, be fully aware of the risk and use the correct position sizing. Those options "gurus" who fail to even mention the risks don't do their job properly. We invite you to join us and learn how we trade our options strategies in a less risky way. Start Your Free Trial
  16. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. You can read more about this strategy in my post How we trade straddles and strangles. Last week we entered a straddle on QIHU. Here is a screenshot from the trade alert posted in real time on the forum: This is how the Greeks looked like when we entered: 4 hours later, we closed the trade for 23% gain: This is how the Greeks looked at the time we closed the trade: Please note how IV jumped from 37% to 46%, enough for 23% gain. We also rolled the trade to lower strike as the stock started to move down. Of course such quick IV jump is not very common, and our timing was nearly perfect. But we patiently waited for a good entry point and identified when the price became cheap enough. This is where extensive backtesting comes handy. Each week we discuss the potential candidates on the forum and select the best ones, based on backtesting and our previous experience. We invite you to join us to see how we execute the straddle strategy and many other non-directional strategies. While most major indexes were down 10% or more in August, we close nine consecutive winners. Related Articles: How We Trade Straddle Option StrategyCan We Profit From Volatility Expansion into EarningsLong Straddle: A Guaranteed Win?Why We Sell Our Straddles Before Earnings Long Straddle: A Guaranteed Win? Start Your Free Trial
  17. Mark Wolfinger

    Selling Strangles Prior to Earnings

    I was taught that one of the assumptions used in this strategy is that for the most part, the market has all ready priced the option correctly for the upcoming news so by allowing for some price movement within your strangle, this is more of a volatility play than a price play. Mark's response: 1) To me they are the same, with the straddle being a subset of the strangle In other words, a straddle is merely a strangle when the strikes and expiration dates are the same. I prefer the strangle because it allows the trader to choose call and put strike prices independently, rather than being 'forced' to choose the same strike. I prefer to sell OTM calls and puts – and that's not possible with a straddle. As far as unlimited risk is concerned, that's a decision for each trader. I prefer the smaller reward and increased safety of selling credit spreads (an iron condor position), but that is not relevant to today's post. 2) A clarification. In is not 'volatility' that incurs a large decrease after the news is released. Instead it is the implied volatility of the options. I'm fairly certain that is what you meant to say. 3) Your earnings plays are far riskier than you currently believe them to be. These are not horrible trades, but neither are they as simple as you make them out to be. 4) I must disagree with whomever it was who told you that "the market has priced the option correctly for the upcoming news." The market has made an estimate of how much the stock price is likely to move. Note that this move may be either higher or lower ad that this difference is ignored when the size of the move is estimated. There is no formal prediction of move size. There is nothing that says the stock will move 6.35 points. What happens is the implied volatility rises as longs as more and more buyers send orders to purchase options. And it makes no difference if they are calls or puts. At some point option prices stabilize (or the market closes for the day) and a 'final' implied volatility can be measured. From the IV, the 'anticipated move' for the underlying is determined. AsI said, it's not as is everyone agreed on how much the stock will move. I hope you understand that when the news is released, there is very little chance that the predicted move is the correct move. Many times the move is far less than expected. That's the reason why selling options prior to earnings can be very profitable. The IV collapses because another substantial price change is NOT expected and there is no reason to pay a high IV to buy either calls or puts. However, if you chose to sell an option that was not very far out of the money (OTM), and if the stock moves far enough, then the IV decrease doesn't do a whole lot of good. Sure you gain as IV plunges, but you can easily incur a substantial loss when the short option has moved significantly into the money. Also remember that part of the time thet stock price gaps by far more than expected. In that scenario, a higher quantity of formerly OTM options are now ITM. Thus, large losses are not only possible, but they are more frequent that you realize. Apparently your trades have worked out well (so far). Think about this: If those option buyers did not profit often enough to encourage them to pay 'high' prices for the options they buy, they would have stopped buying them long ago. The truth is that these option buyers collect often enough to keep them coming back for more. 5) That means you must be selective in which options you sell into earnings news. This is especially true when you elect to sell naked options. You cannot options on every stock, hoping that any random play will work. This is a high risk/high reward game. It's okay to participate, but please be aware of what you are doing and the risk involved.
  18. For Option Traders, The Real Opportunity in Tesla Inc is After Earnings Date Published: 2017-05-03 Written by Ophir Gottlieb LEDE Tesla Inc, with all of its stock volatility and uncertainty, follows a beautiful pattern after earnings are released and it makes for an opportunity with options. But, we are waiting for the volatile stock move after earnings to happen, and in that next 30-days of equilibrium, we find a gem. TESLA INC AFTER EARNINGSWe can examine this, objectively, with a custom back-test. Here is our custom earnings set-up: Said plainly, we will open our position one day after earnings, and close it 30 days later. We after testing using the 30-day options (monthly option) and we are simply selling an out of the money put spread. To be clear, this is bet that, after the big earnings move, when the price finds an equilibrium, for the 30-days following, a bet that the sock "won't go down a lot," has been a big winner. Here are the results over the last three-years: While that 95.3% return looks tasty, it's actually better than it seems. We treat Tesla's quarterly sales press releases as earnings events too, as any truly knowledgeable trader would. In total, there were 23 earnings and quarterly sales releases in this 3-year period, so that would be 23 trades. That's 23 trades, each for one month, for a total holding period of 23 months. We see 15 winning trades and 8 losing trades. This isn't a panacea -- it's real analysis -- where we look for edge, and repeating patterns. Where risk taken is less than the reward received. It's a fair question to ask if this strategy actually works over different time periods. Here are the results over the last two-years: Now we see a 61.2% return over the last sixteen earnings releases. The short-put spread was a winner 12-times, and it was a loser 4-times. Again, the trade was a winner the majority of the time, not all of the time. But this is a strategy, not an one-time gamble. Finally, we examine the six-months: That's a 33.3% return over the last three earnings releases, and all three trades were winners, while not taking any risk of the actual earnings release. WHAT HAPPENED There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. There is another approach to Tesla Inc before earnings, that we discussed a few days ago. This is how people profit from the option market -- it's preparation, not luck. Take an idea, test it over several periods, note the robustness of the results, and apply lessons learned. To see how to do this for any stock and for any strategy with just the click of a few buttons, we welcome you to watch this quick demonstration video: Tap Here to See the Tools at Work Thanks for reading. 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. The author has no position in Tesla Inc (NASDAQ:TSLA) as of this writing. Back-test Link
  19. @Yowster or others, I'm hoping to get some advice. I occasionally trade unofficial hold through earnings (HTE) calendars and have run into a recurring issue. After earnings, sometimes the price jump in the stock results in my calendar becoming deep in the money. When I try to close out the deep ITM calendar, the market makes it very difficult or impossible for me to close out at a reasonable price. For example, this recently happened to me on RHT. I had an 82C calendar spread March 31 short / April 7 long and at the close before earnings on March 27 the stock price was $82.32. About an hour after the open on March 28, RHT stock was at $86.93. So my 82C were $4.93 ITM. But the mid-price to close out the spread was in a kind-of 'backwardation' (yes, I know that isn't the exact right term, but the situation seems similar). The mid for the short leg was $5.00 and the mid for the long leg was $4.90, so a debit of $0.10 to close the spread. Paying a $0.10 debit to close the spread (or even closing at $0.00) seemed unreasonable given that if I held the short leg through expiration, any premium to close the short options would be gone and hopefully the long option would recover some premium ($0.10 to $0.15 based on my review of other RHT options in different time periods). So I held the spread through expiration and got assigned. I closed out the position the following day using a combo stock / option order on TOS. I'd like someone who has done a number of these HTE trades to help me understand: 1. Has this ever happened to you? How would you recommend closing the trade when the price to close out the calendar spread is "way off" from what seems reasonable (e.g., having to pay a debit to close)? 2. If I do hold through expiration and get assigned, am I still 100% covered by the long option? In other words, will the changes in the long option prices offset changes in the short stock position exactly? I'm guessing the answer is no, but I haven't really looked at this yet and am not sure the best way to model it. I appreciate the advice. Thank you!
  20. equus

    Earnings Date Alerts

    What is the best way to receive an alert to find out when a company has just announced its earnings date? Is there a tool in IB or TOS that can do this or perhaps another way? Have been manually visiting Yahoo but it's quite time consuming to check symbol by symbol each day. Thanks
  21. For full protection, buy ATM options ($98 strike) - all you can lose is the premium you pay (around $5 per 100 shares). So if NFLX will lose say $15, your puts will be worth $15, and you gain $15 minus the premium. If you want just "black swan protection" - against catastrophic loss, you can buy 90 strike. It will cost much less (around $2), but also protects you only if NFLX goes below $90. Another member suggested another strategy: "Alternatively, NFLX volatility is pretty low. Expected move around $9 - don't know the cost basis, but this is what I would do: AUG +95p / -90p / -110c for zero cost. Eg buying bear put spread and financing with 110 call. If NFLX goes down to 90, your loss (assuming 98 cost) is $3. Max gain at 110 is $12. Any outsized move down below 90 has no protection, and above 110 no gain." This is also a viable strategy, but it will protect you only down to $90. If the stock collapses below $90, you are not protected. Here are few other options: Collar Buy July 22 90 put Sell July 22 105 call You are protected below $90, and the gains are capped at $105. Calendar Buy August 19 90 put Sell July 22 90 put You basically buying the put expiring in 4 weeks and reducing the price by selling weekly put expiring the next week. Advantage: reduced cost (only 0.80) and very nice gains if the stock goes down to ~$90. Disadvantage: the spread will start losing money if NFLX crashes much lower than $90. There is no "best strategy" here. You can construct the trade based on your outlook and risk tolerance. And this is the beauty of options - there are endless possibilities to hedge, speculate etc. It's up to you to decide what to do, based on what you want to achieve. Want to learn more? Start Your Free Trial
  22. The following article described few stocks that we use over and over again, cycle after cycle. We said "$TSLA, $LNKD, $NFLX, $GOOG: Thank You, See You Next Cycle". Well, the Next Cycle is already here. NFLX is one of those stocks. Here are our results from NFLX in the recent cycles: +10%, +20%, +30%, +16%, +30%, +32%, +18% Another earnings cycle has arrived, and NFLX delivered another nice winner for us. We opened a pre-earnings calendar at average price of $3.50 and exited at average price of $4.55, booking a 30% gain in the process. That marks eighth consecutive NFLX winner in the last few cycles. But some of our members did even better. Here is a screenshot from the forum: This member booked 47% gain! Here is another one: And one more: Those are real fills from real members. Not hypothetical returns. REAL RETURNS FROM REAL TRADERS. Those returns are even more remarkable when you consider the fact that the stock moved 15%+ in the last few days. We played it non-directionally, so we didn't really care which direction it will move, but booking 30-50% gains on a non-directional strategy after such a move is truly amazing. Earnings season is just starting. We are planning to play GOOG, FFIV, CMG, FB, AMZN, MSFT, BABA, LNKD, TSLA and more. Each stock has its own "character", the best time to enter and its unique setup. We already booked 57.6% ROI since the beginning of 2015. We can help you. If you want to learn those profitable options strategies: Start Your Free Trial
  23. This video describes a trade on NFLX before earnings. The rationale was to take advantage of the increased volatility in our option by initiating this earnings play. We will show you in this video why this trade had a bad risk/reward despite inflated IV. Download video: How NOT to Trade $NFLX Earnings.wmv
  24. NFLX announced earnings today after the close. Couple hours before the market close, I got a following trade alert from one of options sites I follow: Trade: SELL -1 IRON CONDOR NFLX 100 APR 15 520/522.5/427.5/425 CALL/PUT @.91 LMT [TO OPEN/TO OPEN/TO OPEN/TO OPEN] Trade Explanation: For the Volatility Advisory in NFLX, we are selling the Apr 427.5 puts and 520 calls and buy the Apr 425 puts and 522.5 calls for a net credit of $0.91 to open. Underlying Price: $474.22 Click here to view the article
  25. Our long term members know that we like to use few non-directional strategies to play earnings. There are few things we like about those strategies: They are predictable. They are repeatable. They are flexible. They can be used on the same stocks cycle after cycle. The following article described few stocks that we use over and over again, cycle after cycle. We said "$TSLA, $LNKD, $NFLX, $GOOG: Thank You, See You Next Cycle".Well, the Next Cycle is already here. Click here to view the article