Never trade without knowing your Greeks- they all tell you what you need to know,and after a while you can just 'see' prices and know almost instinctively when they look wrong-as I did recently with index options near the money trading at 10% vol- a trade I bought for 5 and sold for 16...and you know what? It went to 100.
About a quarter of the way through the book "Options, Volatility, and Pricing" by Sheldon Natenburg
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What I meant is that it is quite possible with options to enter a position which starts out worth nothing and never changes (unlike stocks). So you can enter a position and it can cost you $100....and you will see in your account that that position is not worth anything. I know this because I did enter a single paper trade just to see what would happen. This was before I started reading any books on options so it was a one directional trade. I bought call options on the company FIVE BELOW two days before its earnings (bought on sept 10th, earnings on sept 12th). The option I bought was Sep 2014 50 call (so expiration was in a few days) and even though FIVE BELOW beat estimates (came in at .15 with .14 expected....an over 7% surprise), my option still expired completely worthless because FIVE BELOW didn't come anywhere near $50. I noticed that when I entered the option it was out of the money, and even after earnings it was still out of the money. I thought that if I bought a 50 call option out of the money when a stock was at say $39 and the stock went up to above $40, then my 50 call option would have appreciated in value at least a little bit. But no, that is not what happened...
After reading a bit on options I know now that Theta is an important consideration and that the option I bought was relatively cheap for a reason (the market was basically telling me that there was no way in hell FIVE would crossover the 50 mark by the september expiration date). How does one trade options on earnings? In this case I thought that FIVE would beat estimates and I was right but I still lost money. In my mind, I didn't think FIVE would get to 50 but I thought that if I bought the 50 call that any appreciation in teh underlying would result in an appreciation of the call: the fact that this is not true is a lesson i learned the hard way. So I'm thinking maybe next time I try to take advantage of earnings I need to pick an expiration date that is further into the future and a strike price closer to ATM. Even so, I thought that beating estimates would make the stock price rise more than a measely 1.6% yet it did not rise more than that on earnings day. It would seem logical to assume that when earnings come in stronger than expected and that news doesn't send the stock flying up this indicates that either the beating of earnings has already been priced into the market or we are in the midst of a bear market (or are on the verge of one); in a bull market, good news should send a stock up easily I think. I haven't traded stocks in many years so please forgive the faulty logic (if it does in fact happent o be faulty
)So how does one trade options based on earnings assumptions? How does one profit when one correctly assumes earnings will be beat? Being right and being profitable are two different things, apparently. Thanks
wow. you must have been kicking yourself for getting out early
You are mixing up enough ingredients to bake a cake, LOL.
Briefly,
How much had the underlying moved in the run up to earnings? How inflated was IV, because as you discovered, IV collapse can negate any move in the underlying. Sometimes though you get a selloff on the news then later it moves up. I don't follow that stock so no idea. But a key point to note, if the option has no intrinsic value, you can easily be right and still lose money because your timing is out. That as you noted is the difference with stocks, leverage aside.
I generally don't play earnings unless I have a strong contrarian view; lottery tickets are more attractive. That said if I have a view I'll trade earnings. A few quarters back I made a months living expenses in a day with a smallish MSFT puts position entered the day before earnings. Two reports tracking PC sales/shipments noted a sharp decrease in volume, yet the analysts were predicting better earnings. May have just been luck, I don't know the breakdown of revenue by channels, but I won anyway. But the bar to success is pretty high, nobody is going to give away easy money with cheap options going into earnings.
Briefly,
How much had the underlying moved in the run up to earnings? How inflated was IV, because as you discovered, IV collapse can negate any move in the underlying. Sometimes though you get a selloff on the news then later it moves up. I don't follow that stock so no idea. But a key point to note, if the option has no intrinsic value, you can easily be right and still lose money because your timing is out. That as you noted is the difference with stocks, leverage aside.
I generally don't play earnings unless I have a strong contrarian view; lottery tickets are more attractive. That said if I have a view I'll trade earnings. A few quarters back I made a months living expenses in a day with a smallish MSFT puts position entered the day before earnings. Two reports tracking PC sales/shipments noted a sharp decrease in volume, yet the analysts were predicting better earnings. May have just been luck, I don't know the breakdown of revenue by channels, but I won anyway. But the bar to success is pretty high, nobody is going to give away easy money with cheap options going into earnings.
Awesome how you saw something analysts seem to have missed. I don't really want to play the lottery with options. I would like to find a niche that keeps me at least breakeven for a while as I learn.
Are there any tools you use in your options research that you would consider so important that you feel you'd be lost without them? lol. If so, what are they? What goes into executing an options strategy? You start with an idea of where the underlying is going, or what the volatility of an option is. Then from there, how do you decide what to do? IS there particular software you use to calculate theoretical option prices based on what you input? thanks
1) I learnt years ago that analysts are full of shit.
2) I use Hoadley to model position value. I also built my own sheets to see in table format values over price and time. Dead without either.
3) I don't have historical IV data so my view on vol is always based on stat vol only, which limits me somewhat. So I tend to base my trades on expected move in UL, while keeping a sharp eye on IV obviously.
Take your time, find your niche. Could be vol, could be price, or both. What matters is you end up profitable.
http://www.hoadley.net/options/options.htm
2) I use Hoadley to model position value. I also built my own sheets to see in table format values over price and time. Dead without either.
3) I don't have historical IV data so my view on vol is always based on stat vol only, which limits me somewhat. So I tend to base my trades on expected move in UL, while keeping a sharp eye on IV obviously.
Take your time, find your niche. Could be vol, could be price, or both. What matters is you end up profitable.
http://www.hoadley.net/options/options.htm
It is definitely different from stock trading, but it depends on what you are trading. At first, do some research while the market is open, and then learn how much things vary. For example, if you are buying deep ITM calls as stock substitutes, you could probably research that after hours. However, if you are trading ATM butterflies, the whole game may have changed by the time the market opens. You'll have to see how it works for you.