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Facebook, Inc. (FB) Message Board

  • benzilla999 benzilla999 Jan 6, 2013 12:01 AM Flag

    Option strategies for earnings

    Most people will buy those cheap calls or puts before earnings and sell them afterwards. The options go to zero and people wonder why they didnt make money when the option went the same way as the person speculated. There is a way around that.

    Buy options now and sell them right before earnings and you will do a lot better.

    Options do not move with the stock. They decay with time and they become very pricey when there is a huge anticipation. This is called implied volatility. I can tell you right now there will be a lot of frothing at the mouth right before the earnings and you will see option prices insanely high. After earnings (and yes it happens everytime), there will be people who buy the nickle options a long ways out of the money and there is s decent price movement and then these options are worthless. Why is this?

    This is because after an event like earnings there is no speculation. People know what happened. Implied volatility went decreased the price of the option a lot. This is called volatility crush. With big price changes some of the volatility remains but implied volatility diminishes a lot.

    If your planning on buying options for the earnings, buy now and beat the rush. As they say buy low sell high. Well buy low implied volatility and sell high implied volatility.

    It is not a great time to buy a straddle or strangle but if you are ambivalent about which way to go. You might try regular or iron condors or butterflies and of course back spreads. You hedge part of your investment but do remember that when you have a spread and you buy and sell at the same time they positions become pretty technical.

    Good luck

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    • I generally agree with you and you will get your runup with FB to earnings, however, for the next earnings report specifically, since this stock wasnt a straight line up since the IPO, you may get some follow-thru if turns out that report truely blowout, eye-opening, IPO hiccup forgiving earnings report as you may get fresh investors to finally come in. If it keeps going up thru this earnings report, you probably hit in on the head on how to play the following quarter. I may only sell half of my options just prior to this earnings. good luck.

      Sentiment: Buy

      • 1 Reply to ferrariinmyfuture
      • I wasn't talking about the run up so much as I was talking about the options premium. So for instance, if a person buys options now and they buy options nearer earnings, they will find that the options are more expensive prior to earnings if there is month or two left on the options.

        Now one thing to consider is that often the rise in a stock is often not that much through earnings. If your contracts are out of the money after earnings they will not have much worth. Most of the value will be intrinsic so you have to count on the rise to put the options in the money. If your holding now that is good time to hold.

        Also take a look at the last earnings and see what happened. There was a nice little spike and then it went down immediately. Most of the rise came weeks after the earnings. Consider this as typical for all companies through earnings. It is very hard to make money on options through earnings so people have to be very vigilant. Also like anything else, there is a possibility of a miss. You have to play whether they will meat or miss around your own conviction. You also have to consider that part of the current run up is on expectations so they may need to have a substantial beat to mirror the last earnings. That is a big bet.

        If you are holding deep in the money options and you can realize the rise in price, then you are in a good position. If your options are otm after earnings, there will be a lot less value and if they are nexts months options and they are otm they could be zero. I am just saying this because I have seen it many times.

 
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