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How to Play Options in the Earnings Season

how to analyze call and put writing
How to Play Options in the Earnings Season
3.5 (70%) 4 vote[s]

This is an easy options trading strategy and very profitable if you play it right:

You know ha he earnings season can cause massive volatility in he stock price resulting in massive spikes or dramatic crashes in a stock’s price.

But you don’t know the extent of the moment.

And you don’t know which direction the price will move in.

Therefore your job is to ensure your capital is safe and you make a profit without entering a high risk trade.

Here’s what you do:

1. Check the results calendar and create an Excel sheet of FNO stocks along with the date of their results.

2. Now, research each company and figure out how much the stock moved when it announced its results in the previous two quarters.

Enter these parameters per stock:

Quarterly Earnings of _____________
Pre Earnings Close – _________
Post Earnings movement (moved up __%; moved down ___%)
Post Earnings Open – _________ (as a % of Pre Earnings Close)

3. Once you have this data, you know the historical percentages by which the stock moved on the results day and the day after that.

4. Select stocks that moved up more than 15%.

At this point, let us assume that M&M Financial Services moved 15% up and down in the last 2 quarters on results day. The current CMP is 471, and the company is expected to announce its quarterly results on 31 December (we are assuming this).

5. Now, your job is to buy a Long Straddle — which means buying a CE and a PE at the same strike price for the same expiry.

Remember that you have to buy it about 1-2 days before the date of the results.

Check the premiums of Call and Put options of the closest strike price – in the case of M&M Financial Services, the closest strike price is 470.

Let us assume the premiums are:

Rs 20 for 470 CE

Rs 20 for 470 PE

That gives us a combined premium of Rs 40 on a strike price of Rs 470, which works out to 8.5%.

BUT we have assumed the stock has moved up or down by 15% on results’ day in the previous two quarters.

If it moves by 15% in the current quarter, our Long Straddle will make a minimum profit of 6.5%  on the strike price (15% movement less 8.5% cost).

That’s all there is to it. This is an extremely low risk and high profit strategy that you can play in the earnings’ season, and if you feel like it, on financial event days.

5 Comments on "How to Play Options in the Earnings Season"

  1. The only point to note in this strategy is that how do we know if the options are not overpriced. Which greek will tell us that options are not overpriced.
    Exactly this happened after the Dec 11 election results where all long straddles ended in losses.
    Long Straddle is a great strategy when option prices are not high and big event is near d corner.
    We should know d actual price of option to compare it to overblown price.

    Regards
    Kapil

  2. Hello Mr. Sunil., if you’re conducting work shop in Hyderabad, please let me know. I will be thankful to you.

  3. When to exit the strategy? A day after the results or on the result day itself?
    15% movement stocks on result day are just a few…

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