Options and Earnings Announcements

Asad Dossani
What I love about options is the wealth of possible trading strategies. A recent Economic Times article talks about traders using options to speculate on Infosys' upcoming earnings announcement. Some of the strategies traders are employing include buying bull spreads and buying strangles.

Let's look at an example of the strangle. As of Monday close, Infosys is trading at Rs 1,181. A strangle is a purchase of an out of the money call and an out of the money put option. It is a long volatility trade. If the stock moves a lot, you make money. If the stock doesn't move much, you lose money. Note that it doesn't matter which direction the stock moves. What matters is the size of the movement.

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Suppose you buy the 1,280 call and the 1,080 put for a total price of Rs 33. You'll make a profit if Infosys ends up trading above Rs 1,313 or ends up trading below Rs 1,047. If the price finishes in between those two levels, you make a loss.

Essentially, the stock needs to move by 11% in either direction for you to make a profit. That's a large move. Of course, this is related to the upcoming earnings announcement. If you think Infosys is going to move by 11% in either direction after the earnings announcement, then you should make this trade.

There's an alternative. If you think Infosys is unlikely to move by this amount, you can do the opposite trade. You can sell the strangle. Instead of paying the premium, you now collect the premium.

And hopefully, the stock doesn't move too much once earnings are released. After that, you can either close out your positions for a gain or hold them until expiry.

Now I'm not recommending any particular option trade here. I'm not a fundamental analyst, and I have no idea what Infosys' earnings are going to be.

But if you are knowledgeable about this stock, or any other stock, you can do these types of trade. For individual stock options, the money-making opportunities are best right before earnings are announced.

If you're ready to learn more about options, lookout for an email from me in a few days time. I'm going to announce something big, so be ready!

How would you trade a company's earnings announcement? Share your views in the Club or share your comments here.

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2 Responses to "Options and Earnings Announcements"
Haresh Haswani
07 Oct, 2015
Options selling requires huge margins which will keep varying as m2m will change everyday. I feel a professional trader can take this risk. As retail traders what would you suggest as options are best whether you are high or low on capitalLike 
sunder
07 Oct, 2015
Dear Asad: The quality of the articles published under the head "profit Hunter" has been improving day by day. It is very simple, straight and up to the point and explained with examples. Though I have not entered into option trading till now , your articles has given me confidence to enter into option trading. ThanksLike 
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