Going long or short with stocks during earnings releases is risky. Using options, on the other hand, can reduce risk and increase reward.
I believe I have found a method for almost always profiting during earnings season. I'd like to know what you think and if you see any flaws or invalid assumptions.
The method works as follows:
Two full calendar weeks prior to the earnings release date, buy approximately $100 worth of CALL options contracts at a strike price 5% higher than the current stock price. Then, wait until the day after the earnings release (if earnings release is after close), and sell immediately at open next day after earnings.
And then, repeat this for many different stocks that often dramatically fluctuate in price with earnings releases (for instance, tech stocks).
So as an example:
Last Thursday (the 26th), NVDA closed at 109.65, and NVDA $115 CALL options were $1.14 each at day end. Here we would buy one CALL option (100 contracts), hold through February 9th (when NVIDIA releases its earnings), and sell immediately at open the next day (the 10th). Then, if NVDA's price goes up to $122, we will make a little under $600 profit, and if the price is under $114 on the 10th, then we lose our $100 investment.
And then in addition to NVDA, also do this with NFLX, EBAY, AMZN, GOOG, AMD, FB, and CRUS (or whatever stocks we wish).
I ran some calculations based on history. Please note that these projections assume options for each stock can be purchased for under $2 two weeks prior to earnings releases. Here are the projections (note that these figures are only approximate):
| Date | Symbol | 2-Week % Change | $100 CALL | $1000 CALL | $10000 CALL |
|---|---|---|---|---|---|
| 2016-10-17 | NFLX | 13.64% | $1,150.00 | $11,500.00 | $115,000.00 |
| 2016-10-19 | EBAY | -8.24% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2016-10-27 | GOOG | 3.88% | $65.00 | $650.00 | $6,500.00 |
| 2016-10-27 | AMZN | -5.7% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2016-11-10 | NVDA | 12.49% | $975.00 | $9,750.00 | $97,500.00 |
| 2016-10-20 | AMD | -6.61% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2016-11-02 | FB | -6.23% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2016-10-27 | CRUS | 6.96% | $320.00 | $3,200.00 | $32,000.00 |
| Total | $2,070.00 | $20,700.00 | $207,000.00 | ||
| 2016-07-18 | NFLX | -11.63% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2016-07-20 | EBAY | 21.15% | $1,900.00 | $19,000.00 | $190,000.00 |
| 2016-07-28 | GOOG | 7.18% | $330.00 | $3,300.00 | $33,000.00 |
| 2016-07-28 | AMZN | 3.21% | $60.00 | $600.00 | $6000.00 |
| 2016-08-11 | NVDA | 10.18% | $625.00 | $6,250.00 | $62,500.00 |
| 2016-07-21 | AMD | 14.14% | $1,175.00 | $11,750.00 | $117,500.00 |
| 2016-07-27 | FB | 9.2% | $580.00 | $5,800.00 | $58,000.00 |
| 2016-07-27 | CRUS | 17.77% | $1,500.00 | $15,000.00 | $150,000.00 |
| Total | $6,060.00 | $60,600.00 | $606,000.00 | ||
| 2014-07-21 | NFLX | -3.83% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2014-07-16 | EBAY | 1.19% | $20.00 | $200.00 | $2,000.00 |
| 2014-07-17 | GOOG | 1.83% | $25.00 | $250.00 | $2,500.00 |
| 2014-07-24 | AMZN | -3.24% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2014-08-07 | NVDA | 0.61% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2014-07-17 | AMD | -14.06% | -$110.00 | -$1,100.00 | -$11,000.00 |
| 2014-07-23 | FB | 16.92% | $1,400.00 | $14,000.00 | $140,000.00 |
| 2014-07-23 | CRUS | -6.75% | -$110.00 | -$1,100.00 | -$11,000.00 |
| Total | $895.00 | $8,950.00 | $89,500.00 |
The "2-Week % Change" column shows the 2-week change from 10 days before earnings through the open of the day after the earnings release. Also, I ran these calculations for a total of 10 earnings periods, and the average profit/loss, using $100 per stock above, was $3,815.00. The minimum profit/loss was $895.
As you can see, if these calculations are correct (do they seem so?), then this method is potentially pretty lucrative, and we will almost never experience losses during earnings seasons.
Also, in theory, we can scale up our investment from $100 per stock to $1000 or even $10000.
Does anyone have any thoughts? Are there any holes with this strategy?
Submitted January 28, 2017 at 08:02PM by chaddjohnson http://ift.tt/2kzGgmz
