Facebook Inc (NASDAQ:FB): How Earnings Affect Option Trading

2016-12-20

Author: Ophir Gottlieb

Written by Ophir Gottlieb

Preface
Earnings had an affect on Facebook option trading, but not how you might have first guessed.

Facebook Inc has set the world on fire with its various social media platforms boasting 1.8 billion monthly active users (MAUs) on Facebook Proper, 1.1 billion on WhatsApp, 1.1 billion on Facebook Messenger and 600 million, now, on Instagram.

The user growth as translated into substantial revenue and earnings growth. Here's a chart of both:

That growth has turned the stock into a top performer, with a rise of 46% over the last two-years. There is an option strategy that has worked very well for Facebook Inc (NASDAQ:FB) over the last two years, but it's not about guessing stock direction. In fact, there's actually a lot less 'luck' and a lot more planning in successful option trading than many people know.

STORY
While we often look at selling puts, selling put spreads is also one of many option trading strategies that can be employed to take advantage of a bull market. For Facebook, it has been a winner if done during earnings releases. But, there's a hidden result that we must address. Here's how the strategy did over the last two-years if we only traded during earnings:

While the strategy looks good enough, it actually isn't. Here is the option trading compared to the stock (in gray):

We can't get blinded to results that are out of context. Selling those put spreads during earnings vastly under-performed the stock itself and that does us no good. As usual, we always examine option trading strategies when earnings are avoided, and in this case, we get a fascinating result:

While our memory might have us thinking that Facebook Inc earnings results are always good, they actually aren't necessarily good for the stock. In fact, selling put spreads, which is a risk contained option trading technique, does much better when earnings are avoided. Here is that same option trading strategy to stock trading return chart for this new approach:

That yellow highlighted line is the option strategy employed when we always skip earnings.That is, every time earnings approached, we closed the strategy (held no position), then started the strategy again after the volatility of earnings had ended.

These are the gems we seek to uncover with the CMLviz.com Option Back-tester. Methodical, relatively risk averse option trading techniques. Here's the best part, we can identify this trading result for Facebook Inc (NASDAQ:FB) in just a few seconds. Check this next section out:

WHY THIS MATTERS
There's actually a lot less 'luck' and a lot more planning in successful option trading than many people know.

But it's not about trying to guess which stocks will go up or down.

What the back-tester allows us to do is find calm, low stress stocks or ETFs (like SPY, QQQ, etc), and find the option strategies that have created a high percentage of winning trades, gaining profitability slowly, while avoiding unnecessary risks - specifically, avoiding earnings.

In a five minute video, your entire view of the options world and what people mean when they say 'expert trader' will be turned upside down - to your advantage.
Tap here to see the CML Pro option back-tester.

Thanks for reading, friends.

Risk Disclosure
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.