How To Trade Facebook Earnings

| October 20, 2017 | 0 Comments

optionsEarnings season is upon us again, seemingly out of nowhere. Has it already been three months since last quarter’s results were released? Well, many of the most widely followed companies don’t report until November, so I guess we have some time to come up with earnings-related trading ideas.

Most of the time, traders think of earnings season as a time to capture big moves in stocks. After all, many of the biggest gaps in stock prices occur due to earnings results. A major beat or miss in revenues, profits, or guidance can definitely change peoples’ opinions on a stock in a hurry.

Because of the opportunity to generate out-sized returns, you’ll often see options traders purchasing options ahead of earnings. It’s not a bad strategy, and can be your best chance to make long options trades pay off. Moreover, you can create long options strategies which earn profits regardless of stock direction. You don’t have to pick the direction – only that you expect a big move to occur.

These types of trades often take the form of straddles or strangles. Buying a straddle involves buying the at-the-money call and put at the same time, in the same expiration. This trade makes money if the stock moves in either direction by expiration, as long as it moves enough to cover the cost of the trade.

A strangle is similar to a straddle except an out-of-the-money call and put are used instead. Using out-of-the-money options lowers the cost of the trade, but the underlying stock has to move farther compared to the straddle for the trade to make money.

However, buying straddles and strangles certainly isn’t the only way to make money during earnings season. If you believe a stock isn’t going to move that much (or as much as the option market thinks), you can sell those strategies as well.

Granted, selling straddles and strangles is far riskier and not the sort of thing I’d recommend for most options traders. However, at least one trader believes Facebook (NASDAQ: FB) is going to remain in a range post-earnings. This trader felt selling a strangle (or 225 of them in this case) was the best way to take advantage of the situation.

More specifically, with FB earnings on November 1st and the stock price at $174, the trader sold the November 3rd155-192.50 strangle for $0.78 in credit. As long FB remains between roughly $154 and $193.50, this trade will make money. As you can see from the chart, those breakeven points are well outside the recent range for the stock.

While that does seem like a wide range, I personally don’t think a $0.78 credit is enough to warrant this kind of trade. I’d be especially concerned since there are no protective puts or calls purchased outside the short strikes to keep a lid on risk. (If calls and puts were purchased outside the short strikes, the trade would turn into an iron condor.)

Instead, if you believe FB will stay in a range despite earnings, an iron condor expiring November 17th may make more sense. The 145-150-195-200 iron condor (selling the 150 puts and 195 calls, buying the 145 puts and 200 calls) generates about a $0.50 credit. It gives you a bit more cushion than the strangle we just talked about, and keeps a lid on your max loss potential because of the long options on the outside.


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Category: Earnings Roundup, Options Trading Strategy

About the Author ()

Jay Soloff is an options analyst with Investors Alley.