How do I manage the potential risks of earnings season with options？

Earnings release day is a big day for any publicly traded company and stock prices may see abnormal movements.

Earnings reports are influential and can affect the market either negatively or positively. Since some earnings reports are so influential, the market tends to move quickly and swiftly, creating volatility.

But with options, you can hedge your underlying interest and may even potentially gain, if you have options knowledge.

Options, which give the owner the right to sell, if it's a put option, or buy, if it's a call option, at a specific price by the expiration date, if it's in the money.

Let's say you own 300 shares of Pineapple.

Will you worry about the price decline after the release of Pineapple's earnings report?

I guess your answer is YES!

In this case, shareholders may lower their exposure to losses by utilizing options.

If you worry about the decline after the release of the earnings report, some traders may:

By paying the premium, you are essentially buying the right to sell the underlying asset at the strike price, giving the holder some downside protection.

Note:

1. This is only applicable to bearish investors.

2. If the options are exercised, your underlying will be sold as promised (buy put = sell underlying stocks).

3. And a major drawback of the strategy is its cost. This cost can eat into potential profits or lead to losses if the stock price does not rise enough to cover the premium paid

2) Owning stocks + Selling put

Selling the put obligates you to buy the stock at the strike price if the option is assigned.

If you are taking a long-run bullish approach and plan to buy more in the future, then you can consider selling a put.

Note:

While this strategy can provide some income and limited downside protection by earning a premium, it also has limitations and potential risks. It is important to weigh carefully when considering whether to use this strategy, and to continuously monitor your positions to avoid unexpected losses.

If you already hold the stock and think it will be bullish in the long run, but fear a short-term shock from earnings report news could affect the stock by going either up or down, you can sell the call option to earn the premium from selling call options.

Note:

While Covered Call generates income and reduces risk, it comes with downsides such as limited profit potential, market risk, and assignment risk. It is important to weigh carefully when considering whether to use this strategy, and to continuously monitor your positions to avoid unexpected losses.

Let's assume you currently hold 100 shares of a fake company called Pineapple. The cost of buying Pineapple is $160/share. Thus your total cost is $16,000.

Currently, Pineapple is at $165.

You are bullish and feel that the Pineapple may go up to over $170 in the long run but traverse up or down for a small period of time.  And you are happy to sell it if Pineapple rises to $170.

Then you may sell a call with an expiration date of 1 month, with a strike price of $170, and a premium of $3.8/share*100=$380.

Break-even point after a month = (stock price) - (the premium received for selling the call) = $160 - 3.8 = $156.2

The strike price is $170 > the current stock price is $158, so the buyer will not invoke their right to buy the stock at that price, but you can still get the premium ($380), which offsets part of the loss of the underlying stock.

Because the premium is the payment that the buyer of an option must pay to the seller in order to acquire the rights granted by the option contract.

Note: There is a certain limit to hedging, with a maximum of $380. If the current stock price continues to fall below the break-even point of $156.2, the loss would be substantial. Please see Scenario 4.

The strike price is $168 > the current stock price is $160, the buyer will not invoke their rights, so you also earn premiums while your stock gains in value.

The strike price is $170 < the current stock price is $180, so the buyer will invoke their right to buy the stock at the strike price of $170.

In this case, the trader must fulfill their commitment to sell the Pineapple stock for $170 (+$17,000) and collect the premium (+$380) for the commitment. Now, the Pineapple stock has reached an ideal price and sold successfully, with added income (premium).

But, please note that this is not an ideal scenario.

The option seller would rather keep the shares and participate in the price increase up to $180 and beyond. Instead, they are capped at $170/share since they will have been assigned.

This is a drawback of covered calls. Potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call.

The strike price is $170 >> the current stock price is $100, so the buyer will not invoke their right to buy the stock at the strike price of $170.

A covered call strategy has a certain limit to hedging, being the premium earned, which can not 'cover' the whole loss of the stock price dropping from $160 to $100. So you may meet substantial losses in this case.

!!!To avoid such a situation, you may consider,

adjusting or closing out positions and continuously monitoring positions to avoid substantial losses when selling covered calls.

1. Specific stock detailed quotes

2. Transform tap [Quotes] to [Options]

3. Select [Covered stock] strategy

4. Choose your expiration date and strike price

Moomoo does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.

These hypothetical examples are included for illustration purposes only and is not intended to be representative of actual results or any specific investment, which will fluctuate in value. The determinations made in these examples are not guarantees or projections, and no taxes or fees/expenses are included in the calculations which would reduce the figures shown. Please keep in mind actual results will vary.This article is for educational use only and is not a recommendation of any particular investment strategy. Content is general in nature, strictly for educational purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. All investing involves risks. Any examples are provided herein are for illustrative purposes only and not intended to be reflective of results any investor can expect to achieve.Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.