In our efforts to find new and different option opportunities in this world of 5-year-low SPY option prices, we have been checking out pre-earnings-announcement strategies.
Just prior to the earnings announcement, implied volatility (IV) of the options which expire just after the announcement escalates due to the uncertainty of what the earnings, sales, margins, or guidance might be.
We have had some success buying calendar spreads at strikes below, near, and above the stock price in advance of an earnings announcement. These spreads have a tremendous IV advantage (the options we sell have a higher IV, making them more “expensive” than the options we buy).
Last week, we used this strategy on Starbucks (SBUX). When we used just the calendar spreads, we managed to make 11% after commissions by selling the spreads the day after the announcement. This was out fourth consecutive week of making pre-earnings announcement gains.
In addition to the calendar spreads, we also bought some extra straddles or strangles (both puts and calls) which were designed to protect the entire portfolio against a loss in case the stock moved big-time after the announcement. This time around, with SBUX edging up about $1.50 after the announcement, the straddle-strangle protection lost money when IV for those options plummeted after the announcement, and the portfolio that used both calendars and strangles broke even for the week.
While studying the past history of SBUX we discovered an interesting pattern which is the subject of this week’s Idea of the Week.
A Post-Earnings Starbucks (SBUX) Play
Last week SBUX rose $2.00 for the week, spurred higher by a good earnings report and the company re-affirming guidance. We checked back over the last 13 times when SBUX rose by $2.00 or more in a week and learned that in the subsequent weeks, 10 times at some point during the week, SBUX traded at least $1.00 lower.
With SBUX trading at $56.81, I will be buying Mar-13 57.5 puts, hopefully paying about $2.19, Friday’s closing ask price. Immediately after making this purchase I will place an order to sell those puts for $.70 higher than what I paid for them (if the stock falls by $1.00 this put option should move $.70 higher).
If this trade executes, I should make about 30% on my money after commissions.
If the stock starts moving higher instead of lower, I will sell some Feb1-13 57.5 puts to reduce or eliminate possible losses (but I will be careful not to sell quite as many puts as I own long ones so that if the stock does fall, I should still make a gain).
I expect to close out the positions by the end of the week unless the stock has edged up to being very close to $57.50 in which case I might sell the next Weekly series 57,5 puts because the time premium should be quite high (and I have six more weeks over which I can continue to sell puts at this strike so that I can get back my initial $2.19 back, and more).
Tags: Calendar Spreads, Calls, Credit Spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, ETF, implied volatility, Portfolio, Profit, profits, Puts, Risk, SBUX, Startbucks, Stocks vs. Stock Options, Terry's Tips, thinkorswim, VIX, Volatility