Short or long Earnings

Discussion in 'Options' started by maninjapan, Feb 26, 2009.

  1. I havea question about how to play earnings. Now obviously this would be a case by case scenario but looking at 2 possible choices, short the IV spike or go long gamma for a big move. What would you have to consider before choosing?
  2. This is a comfort zone decision, but for my CZ:

    1) If this is a one time play, it's a gamble. If you, plan to do this consistently it's a high-risk / high reward strategy. Be careful how much size you trade.

    2) Selling premium is usually the better play. But I suggest that you sell spreads and not naked options

    3) I prefer going as far OTM as possible - but you must collect a 'decent' premium - or else it's just not worth it.

    4) If you have reason to expect a big surprise (I know, if you expect it, how can it be a surprise?), avoid the play.

  3. When I'm doing earnings, it's short the IV spike in ratio calendar spreads or strangles in higher probability scenarios where there's more than normal skew b/t the two front months, both are well above HV, and the P&L graph has a good reward to risk ratio.

    Currently, I don't do any of these because the daily market voilatiility is a much better trade. If and when they settle things down, I'll return to grinding out EA plays :)
  4. Playing earning can be done with a technique I have described earlier. Look for companies announcing earnings the week of option expiration. If you expect an upward surprise, buy an ATM call option. After the anticipated move, sell the underlying short. You lock in your upside (hopefully with a profit), and you cover your downside. You must take into account the premium cost to see if the stock can move enough. For a downward surprise, do the opposite (buy an ATM put option and buy the underlying after the anticipated move.)
  5. rluser


    I do not understand why you would do this at all. After successfully anticipating this market move, why would you turn the position around and guess for a move in the other direction before expiration?
  6. How do you know what the underlying will do after the anticipated move? How do you know how big the move will be? Also, getting out of the call will be difficult for the spread will not permit you the full profit. As an example: suppose you buy an ATM 90 call for APPL at 1.00. It moves upward 3 points--to 93--upon announcing earnings. It is virtually impossible to close the call at 3 because of the spread. Plus if you "get greedy" and hope for a bigger rise and you are wrong, you lose the premium. Instead, just sell short APPL at 93. This way you are guaranteed your two point profit. If APPL continues upward, then so be it. If it reverses, you still lock in your profit. Plus, if APPL crashes, you can make unlimited profit on the downside (# of points down minus the premium paid (1.00)
  7. rluser


    It will feel rather painful if you are still holding at 100.
  8. No it won't.

    It's as if he sold the call at $3.00.

    The stock can go to 500 and it would not be painful at all.

    The $200 was earned and locked in.

  9. rluser


    Whoops. Brainfart. I got caught up in the exercise of unwinding the position other than through exercise.

    Thanks, jwcapital, for pointing out this option liquidity work around again.
  10. With a 3 pt move to 93, there will be no problem closing out the call for 3, regardless of the spread.

    But given that it's probably just a random example to demonstrate a concept, it can be carried one step further. If one still thinks that there's some upside but wants to lock in some of the gain, you can go to delta neutral by shorting less than 100 shares per short call.

    Both suggestions (yours and mine) are not the best idea if it's an earnings play because IV will usually collapse in the morning and continue to contract during the day and on subsequent days unless there's new news to pump it up. With EA's, the best play is to close long options when the post news move fades.

    For the OP, don't be afraid to use shares of the underlying in the pre and post market to adjust your position. Very often you get your move outside of regular hours and by the time the regular session begins, the gain has been lost.
    #10     Feb 27, 2009