Earnings season: Share your trading tales!

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[Options ABC] Three useful option strategies to consider during earnings season

Moo Options Explorer joined discussion · Apr 27 21:47

Hello everyone and welcome back to moomoo. I'm options explorer.

In the upcoming weeks, we are going to see a flurry of earnings reports in the U.S. stock market, including notable appearances from companies like $Coca-Cola(KO.US)$， $Apple(AAPL.US)$,and $Amazon(AMZN.US)$.

After a company's earnings report, stock prices often experience high volatility.

For options traders, volatility often presents opportunities; higher volatility means more potential for profitable options investments.

If you wish to start learning about options, please click here to learn more.

[Options ABC] Three useful option strategies to consider during earnings season

Options can not only capture gains from volatility but also mitigate investment risks.

If managed properly, options allow traders to leverage a smaller amount of capital to magnify profits from earnings-driven volatility.

They can also reduce downside exposure if earnings disappoint.

With earnings season upon us, how can traders secure more profits?

What innovative strategies can leverage the power of options?

Today, we'll explore three practical options strategies for the earnings period.

Disclaimer: This article uses Tesla as an example for illustrative purposes only. The strike prices, expiration dates, and any market data shown is for demonstration and educational purposes and should not be considered investment advice or used as a basis for actual trading decisions. The earnings release date and other details may not reflect current market conditions. Readers should conduct their own research and analysis before making any investment decisions.

Ⅰ. Bull Call Spread: expect a limited increase in the underlying asset price

Suppose stock $Tesla(TSLA.US)$ is trading at US$176.880, and Bob expects it will go up to US$190 after its earnings release.

In such a case, Bob conducts a bull call spread:

Open Position:

Based on the current stock price, Bob buys a Call 1 at US$6.3 with a strike price of US$175;

Based on the predicted price, Bob sells a Call 2 at US$1.07 with a strike price of US$190.

Hence, Total Cost of Bull Call Spread = Net Premium Paid Per Share * Multiplier * Contract Size = ($6.3-$1.07) * 100 * 1 = US$523.

Theoretical Maximum Gain:

If the stock price of TSLA is trading above US$190 on the expiry date, maximum gain will be achieved.

Call 1 would be exercised, and Bob would buy 100 shares of TSLA at US$175 per share.

Call 2 would be assigned, and Bob would sell 100 shares of TSLA at US$190 per share.

Maximum Gain = (Strike Price of Call 2 - Strike Price of Call 1 - Net Premium Paid Per Share)* Multiplier * Contract Size = （190-175-5.23）*100=$977.

Theoretical Maximum Loss:

If the stock price of TSLA is trading below US$175 on the expiry date, the maximum loss will be achieved.

Both call options would expire worthless, and the maximum loss equals the total net premium paid.

Maximum Loss = Net Premium Paid Per Share * Multiplier * Contract Size = (-US$6.3 + US$1.07) * 100 * 1 = -$523.

Other Considerations:

① Limited loss

The strategy caps the loss, with the maximum loss being the net premium paid.

② Limited gain

Simultaneously, this strategy also limits the return. The maximum profit is realized if the stock price is at or above the strike price of Call 2.

Ⅱ. Short Put: expect to acquire the underlying stock at a lower price

Suppose the current stock price of $Tesla(TSLA.US)$ is US$176.880, and Bob wants to buy the stock at a lower price as he believes it would drop after the earnings report release.

In such a case, Bob conducts a short put:

Sell to Open:

Bob sells a put of TSLA at US$1.2 with a strike price of US$165 (his psychological price).

Hence, the total premium gained = US$120.

P/L Analysis

After setting up this short put strategy, he would:

✔️receive a premium after selling the option;

✔️️buy TSLA stock at the strike price should the option become in the money and is exercised.

① If the stock price of TSLA is trading above US$165 on the expiry date, the option would not be exercised.

In this case, Bob would not need to fulfill his obligation.

P/L of the Strategy = Total Premium Received = US$1.2 * 100= US$120.

② If the stock price of TSLA is trading below US$165 on the expiry date, the option might be exercised.

Suppose the option buyer chooses to exercise the option, and Bob needs to fulfill his obligation and buy 100 shares of TSLA stock at the price of US$165.

In such a case, Bob not only gains premium, but also manages to buy the stock at a lower cost thanks to the short put.

Other Considerations:

① Risk Management

Risk management is extremely important for traders when they conduct this strategy, as it is possible for the stock price to drop far below the strike price, resulting in substantial losses.

② Margin is required

Unlike buying options, shorting options involves much higher risks. Hence, option sellers are required to deposit funds as margin first.

Moomoo users may go to Account> Margin Account> Buying Power & Risk Level to see their initial margin and maintenance margin requirements.

Ⅲ. Long Straddle: strive to make profits from price movement regardless of its direction

Suppose the current stock price of $Tesla(TSLA.US)$ is US$176.880, and Bob expects the stock price to fluctuate significantly on that day, but he is unsure of the direction.

In such a case, Bob conducts a long straddle:

Open the Position:

The strike price of a long straddle should be at-the-money or as close to it as possible, as the strategy seeks to profit from a strong move in either direction.

Bob buys a call at US$6.3 with a strike price of US$175 and buys a put at US$4.15 with a strike price of US$175.

Hence, Total Cost of Long Straddle = (US$6.3 + US$4.15) * 1 * 100 = US$1045.

The Upper Breakeven Point = Strike Price + Net Premium Paid Per Share = US$175 + （US$6.3 + US$4.15）= US$185.45.

The Lower Breakeven Point = Strike Price - Net Premium Paid Per Share = US$175 - (US$6.3 + US$4.15) = US$164.550.

Theoretical Maximum Gain:

If the stock price of TSLA is trading above the upper breakeven US$185.450 or below the lower breakeven US$64.550 on the expiry date, the strategy starts to profit.

Profit potential is unlimited on the upside as the stock price can theoretically rise to infinity, and downside profit potential is substantial as the stock price can fall to zero.

Theoretical Maximum Loss:

If the stock price of TSLA is trading between US$164.555 and US$185.450 on the expiry date, the maximum loss will be achieved.

Maximum Loss = Net Premium Paid Per Share * Multiplier * Contract Size = (-US$6.3 - US$4.15) * 100 * 1 = -US$1045.

Other Considerations:

① Price Direction Neutral

Given the strategy involves buying a call option and a put option at the same strike price with the same expiry date, it is price direction neutral, with no bias towards the direction.

② Volatility

Volatility is crucial for this strategy. Without prominent price movements, this strategy will likely end at a loss.

Wrapping up today's session, let's revisit that earlier question and break down the answer:

[Options ABC] Options Rollover: Balancing Risk and Reward in the Volatility of Earnings Season

[Options ABC] Guide to options trading during earnings season: understanding Order Types and Attached Orders

[Options ABC] How to trade options during earnings season: Gamma Scalping

[Options ABC] New and Enhanced Tool & Volatility Analysis: IV、HV、IV Rank、IV Percentile

Note: Any app images provided are not current and any securities shown are for illustrative purposes only and is not a recommendation.

Note: All profits and losses below are calculated based on the assumption that you choose to exercise the option at expiration, excluding commissions and other charges. In real trading, you can either exercise your option or close your position before expiration, and the actual profit and loss will vary.

Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more