Buying Options before Earnings

Ghost of Cutten · May 17, 2013

Quote from garage sale:

Let's say I believe that a stock will go up 10%, after the release of earnings. It may take 1 day or 2 weeks. I want to be a call buyer, and not a put seller because I do not want to be short put if the company misses earnings and the stock gaps down.

When buying the call, what are the factors that I need to consider? What would be the fair price? If I have 3:1 risk/reward, is that good? I'm reading Hull right now but would like to get some ideas from the pros here.

Thanks in advance.

The main issue is the fat implied vol, and the vol crush after earnings, will reduce your profit even if you are right. I have played stocks that fell 5-10% after earnings, and only doubled my money on the most leveraged puts I could find - yet if they missed, or even just had flat earnings, I would lose 100%. With long calls if you are not right on the earnings beat, you will lose most or all your premium; if you are right you might make 2-3 times. Those odds suck because earnings beats are generally not 50%+ probability.

Better to use vertical spreads or other options plays that are less exposed to volatility IMO.

garage sale · May 17, 2013

Here are few stocks that showed up on my scan, basically stocks with growing sales and earnings. Most of these had 10%+ move after earnings. I do not have historical option prices or the vol., but if anyone has it and can look back, what would have been the best strategy.

PCLN, MYGN, ONE, TRIP, OAS, NOG, ROSE, MELI, KOG, INVN, AKAM, REGN.

He is another stock that should be coming out with their earnings soon. GLNG.

IV_Trader · May 19, 2013

Quote from noregrets:

The options market is very efficient ...............................
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I am a relatively new options trader........

???

newwurldmn · May 19, 2013

Quote from garage sale:

Volatility is certainly a big component, but how do we determine the fair price and which strike gives the most return for the risk.

Thats the art.

Its no different than asking, "how do i pick stocks that will go up?"

Josef K · May 19, 2013

Quote from garage sale:

Volatility is certainly a big component, but how do we determine the fair price and which strike gives the most return for the risk.

You can use an option calculator to determine the theoretical price of the option on a given day. Plug in the strike, days to expiration, expected value of the underlying, and expected volatility, and you'll get your answer. Do this with several different strikes and see which would give you the best return given what you expect to pay for it.

EDIT: Of course, the one that gives you the best return might not be the best one to buy, because the stock might not move as much as you expect it to.

noregrets · May 19, 2013

Quote from IV_Trader:

???

Did you disagree with my statement that the options market is very efficient at pricing in the expected move from earnings into the option premiums, or with my being up-front that I am relatively new to full-time options trading? If the former, I would very much like to hear your thoughts on it as many options books that I have read have stated that that is the case. If the latter, then not sure how that is helpful.

garage sale · May 19, 2013

Quote from newwurldmn:

Thats the art.

Its no different than asking, "how do i pick stocks that will go up?"

Ok...let's just assume that I can pick stocks that will go up 10%, after earnings, then how can I benefit from it with options.

When Moody's came out with earnings, it was trading around 62.5, and the 62.5 May calls were selling for $1, at exp. those calls were worth $5.40.

PCLN was trading at 740 before earnings, but the 740 calls were priced around 30ish. It clearly seems like PCLN calls were trading at a premium, so in his case (assuming that I can get the direction correct), what could I have done, maybe something like Buy 720 calls and sell 760, or buy 760 calls and sell 800, or buy 800 and sell 840? PCLN 740 calls closed at 64, which only gave a profit of $34 at a risk of $30.

Based on these 2 scenarios, it seems that if I can find options that will give me 3:1 risk/reward, then it may be a good idea to buy it outright or else do some sort of spread to get the r:r to the 3:1 level.

kinggyppo · May 19, 2013

Quote from garage sale:

Ok...let's just assume that I can pick stocks that will go up 10%, after earnings, then how can I benefit from it with options.

When Moody's came out with earnings, it was trading around 62.5, and the 62.5 May calls were selling for $1, at exp. those calls were worth $5.40.

PCLN was trading at 740 before earnings, but the 740 calls were priced around 30ish. It clearly seems like PCLN calls were trading at a premium, so in his case (assuming that I can get the direction correct), what could I have done, maybe something like Buy 720 calls and sell 760, or buy 760 calls and sell 800, or buy 800 and sell 840? PCLN 740 calls closed at 64, which only gave a profit of $34 at a risk of $30.

Based on these 2 scenarios, it seems that if I can find options that will give me 3:1 risk/reward, then it may be a good idea to buy it outright or else do some sort of spread to get the r:r to the 3:1 level.

like newworld said if only it were that easy. You may want to download a demo of think or swim. They have a thinkback feature which allows you to play with what if scenarios, including vol crush, how much the one day change in price is etc.

monkeyjoe · May 19, 2013

Quote from garage sale:

Ok...let's just assume that I can pick stocks that will go up 10%, after earnings, then how can I benefit from it with options

If you know for certain they will go up, you can get more leverage by doing conversions, i.e.,buy a call and sell a put at the same strike. Depending on the prices, you might also use spreads, which are safer if you are wrong.

garage sale · May 27, 2013

So how would the pro play in this situation?

I'm bullish on GLNG and have reasons to believe that it will go up 10+% in the few days or weeks after earnings which is on the 30th. This could go to $40 based on my analysis, but if they miss earnings they could go down 10%. I want to limit my losses so the best bet is to buy calls here, instead o selling puts. Here are the 3 options;

1. Long 35 June calls for $1.55.
2. Long 40 June calls for $0.25.
3. Long 35 June call for $1.55 and sell 40 June calls for $0.25 for net $1.3.
4. Pass the trade because all those options are expensive based on xyz.

I'm leaning towards #3.