protective at the money put going into earnings ... how does the math work?

Discussion in 'Options' started by stockmarketbeginner, Jul 27, 2018.

  1. hello,

    i'm interested in understanding the efficiencies of writing an at-the-money protective put expiring on friday, when the earnings announcement is on the prior wednesday or thursday.

    sometimes i want to buy a stock, but it is right before earnings. i was hoping that since the time decay is so severe, that it might be affordable. if the stock goes down, the value of the put goes up. if the stock goes up, then it offsets the value decline in the put. so i'm wondering if this creates a value-neutral effect. if so, that would be great.
  2. spindr0


    It's not clear from what your position is but I'll guess anyway.

    In order to have an offset, you have to have two positions. If you're writing a put against a short stock position, your protection amounts to the premium received, should the stock rise.

    If you're writing a 'fat' high IV put prior to earnings with no other position then you capture the severe post EA IV contraction and some time decay but you may be put the stock (have to buy it).

    Feel free to clarify what you are trying to accomplish.
  3. What you're describing has the same exposure as a long call (with a lot more margin). And it's always going to be very expensive to hold over earnings. Really, if you're comfortable with the earnings risk, hold the shares through earnings. If you're not, wait until after earnings.
  4. thanks. i want to do this:
    buy 100 shares of a stock at 88.00 per share on a wednesday. then immediately buy the 88.00 put expiring that friday for 1.00 per share. then when earnings report on *thursday*, my stock is protected going into friday. total investment: 8900

    three scenarios can occur:
    good earnings report, stock goes to 88.80, put drops to 0.20. sell the put. gain $80 on stock, lose $80 on put. value of investment stays at 8900

    bad earnings report, stock goes to 85.00, put rises to 4.00. sell the put. lose $300 on stock, gain $300 on put. value of investment stays at 8900.

    neutral earnings report. stock stays flat, put drops to 0.90. sell the put. value of investment is now 8890, a $10 loss.

    that is what i am hoping for. i want to neither lose nor gain through earnings day. i want my $8800 in stock to be protected for two days to get past earnings volatility. i am hoping since the option is bought two days before expiration, i get the option inexpensively.
  5. This is a flawed assumption. Should be stock stay flat put drops BY .90, sell for $10, $90 loss. Almost all the premium will disappear when the earnings drop because that's the event inducing volatility.
  6. spindr0


    The short answer is that it's a terrible bet because premium inflates dramatically prior to the EA (assuming that the stock has a pulse) and the premium is going to collapse after the news release.

    And FWIW, Stk + Put = Call so you could just as well buy the call for the same (poor) result.

    By 4 PM Friday, that put will trade for close to intrinsic value or zero if OTM.

    Scenario (1) Exp. break even is $89. Friday morning it might be $88.80 or so since the put might have some salvage value

    Scenario (2) At $85, the $88 put will be worth $3 and you're down $1
    ( - $3 Stk + $2 put )

    Scenario (3) Stock is flat at $88. Friday morning the put is worth 20-30-40 cents depending on the amount of IV contraction. Loss is 60-70-80 cents.
  7. Just buy the 88 call. You'll tie up less capital and have the same result.

    The equivalence was pointed out above by Beerntrading. Did you not understand what he wrote? If not, avoid the options market until you've read at least one book on the basics.
  8. ironchef


    Great post and great question. :thumbsup: I am rooting for you.

    As many pointed it out to you, your method won't work very well. Option is a very tough game, some of the best minds are your counter parties. However, keep thinking and analyzing, you may find something that works for you.

    For me the most important question I ask every time I come up with a method: Why someone as smart as xxx (market markers, professionals...) want to be my counter party? If I have a good answer, then it is worth a try.

    Option is a probability game where the market will ensure that in general there is no advantage buying or selling.

    Good luck.
  9. How about shorting the stock, selling puts and with proceeds buy a bull spread to protect the upside move