Buying calls on earnings momentum, which ones?

K

klurby

I am not a big fan of buying naked calls, but I like the idea for a short term play. I am looking to purchase some calls on the following stocks prior to earnings; MSFT, NG, ETFC, C What other stocks are you guys following that are releasing earnings reports in the near future?
 
You'd be better off buying Puts. With exception of ETFC these do not have a history of positive earnings surprises.
 
Not a big fan of buying calls going into earnings. Vol is high pre-earnings and even if your underlying stock goes up, the reduction in vol post-earnings can decrease the price of your calls if the jump up wasn't big enough.
 
Quote from klurby:

I am not a big fan of buying naked calls, but I like the idea for a short term play. I am looking to purchase some calls on the following stocks prior to earnings; MSFT, NG, ETFC, C.
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That's like saying:
  • "I'm not a big fan of sunny locations, but I would like to know a good vacation spot in Mexico".
  • "I'm not a big fan of FaceBook, but I just got my 2000th friend the other day".
  • "I'm not a big fan of motor sports, but I would like to get some tickets to NASCAR".
 
You can get a better risk:reward by using a spread, unless the IV on the call you're buying is historically low.

As earnings approaches IV increases so you'd have to buy pretty far in advance. After earnings the IV suddenly decreases so you'd better have had a big move to compensate for it.
 
I used to do straddles the day before earning and close them out the next day on big movers betting the delta will overcome the gamma, but those are so tiring to trade. Now I buy the straddle at market open after the earning / big move / vol crush and close them out end of day or whenever profit hits.

Usually after a big move pre-market, the underlying remains very volatile during the day and has a good chance for profit. It's a lot easier on the nerve not having to deal with the blunt of the iv drop.
 
Quote from anglagard:

Playing pre-earnings is pure gamble.

Learned this the hard-painful way.
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+1. Same experience. I'm not trying to be sarcastic here but when I sat down and looked at EVERY trade I made (I had several strategies at the time) I realized that the earnings trades (buy calls/puts guessing the market's reaction to earnings) were overwhelmingly net negative expectancy. This helped me get rid of strategies that weren't working so I could focus on ones that were. If you really want to play earnings newguy had a good idea (I believe it's from Augen's book) or you might be able to get positive EV from only trading weeklies on UL's that have earnings.
 
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