GOOGL (Alphabet, Inc. Class A) showed significant weakness after Thursday’s close when they reported Earnings and Revenues short of Analysts’ Expectations. While it remains to see where the shares will reopen tomorrow, they were trading at least 4.5% lower in after-hours trading at 4:30 PM ET on Thursday. While this may put a damper on the latest stock market rally, in a week’s time, when Amazon (AMZN), Facebook (FB) and Apple (AAPL) will all have reported earnings, the stock market will have a full opportunity to review the technology sector.
Earnings season presents a significant amount of opportunity for those who appreciate the opportunity to speculate on the outcome of a stock’s price after the announcement. In many cases, such as with bio-tech companies, stocks can move in a drastic manner. In the case of technology and a significant number of S&P 500 companies, the movement is typically not quite as monumental. Options Trading Strategies exist for those of you who are comfortable with absorbing the risks involved in the particular strategy. There are numerous strategies available, but choosing the correct one to meet your risk reward requirements is not always easy. One should always take into account the liquidity of the options that you are trading in addition to the Implied and Historical Volatility, the Implied Volatility Skew and the historical movement of the stock post-earnings.
An Options Trading Strategy that can be interesting for traders who are interested in Buying Stock at lower levels is the 1X2 Put Spread. It involves Buying one Put closer to the current trading price, although still out-of-the money, while Selling two Puts farther out-of-the money. If the Implied Volatility is particularly high and there is a large Implied Volatility Skew, then the Strategy provides the opportunity to establish the trade in a manner that will in most cases make money, or in a strong adverse move you would be required to Buy the Stock. Unlike Selling a Put Outright, the Strategy creates an extra buffer zone where you will make money even if the stock falls after the earnings are announced. The Table below, using AMZN prices just before the close on Thursday, shows Options Prices in the Amazon May and June Expiration Series. Since AMZN will likely open lower tomorrow, we will not use the Implied Volatility column. You’ll be able to see the new prices and Implied Volatilities when the market opens tomorrow. For example, if you were comfortable Buying Amazon Stock at $500/share, then you could establish the 540/520 1x2 Put Spread. The Table below provides the details of the trade on Thursday, if AMZN is trading lower tomorrow, the credit will likely be larger. If you have trouble understanding the Strategy, take a look at the Options Guide for reference.
If you are comfortable owning Amazon at about 20% lower than its current price, the strategy may be interesting. The problem is, while owning Amazon 20% lower than its current price seems like a wonderful proposition, if it opens 30% lower after an earnings announcement then a naked seller of options will not be too happy. Analyzing strategies makes Options Trading creative and interesting. The Strategy shown below is for illustration purposes only and should not be construed as a trading recommendation. Earning season is upon us, finding the appropriate strategy to meet your individual risk/reward parameters is essential. By using the tools that are available, including liquidity analysis (the liquidity shown below would not be considered too liquid when compared SPY Options), Implied and Historical Volatility and the Skew, your analysis goes a long way towards finding a winning Options Strategy for Earnings season.
OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.