Successful Earnings Option Trading: Flagstar Bancorp Inc (NYSE:FBC)

Flagstar Bancorp Inc (NYSE:FBC) : Option Trading Short Puts and Earnings

Date Published:

As we look at Flagstar Bancorp Inc we note that a short put is one of the most common implementations of an option strategy, but the analysis completed when employing the short put often times lacks the necessary rigor especially surrounding earnings. This is a risky strategy, but there is a clever way to reduce risk.

With relative ease, we can go much further -- to identify the risks we want to take, and those that we don't in order to optimize our results. This is one of those cases.

There's actually a lot less 'luck' involved in successful option trading than many people realize. We'll get specific with short puts on FBC. Let's look at a two-year back-test of a short put strategy with these quick guidelines:

* We'll test monthly options (roll the trade every 30-days).
* We will avoid earnings.
* We will examine an out of the money put -- in this case, 30 delta.
* We will test this short put looking back at two-years of history.

What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.

Now we can peruse the results.

If we did this 30 delta short put in Flagstar Bancorp Inc (NYSE:FBC) over the last two-years but always skipped earnings we get these findings:

short 30 Delta Put
* Trade Frequency: 30 Days
* Back-test length: two-years
* Always Avoid Earnings

Gross Gain: $463
Gross Loss: -$250
Wins: 22 Losses: 8

Short Put Return:  26.5

Selling a put every 30-days in FBC has been a pretty substantial winner over the last two-years returning  26.5%. Even better, the strategy has outperformed the short put that was held during earnings. Let's turn to that piece, now.

Just doing our first step, which was to evaluate the short put while avoiding earnings is clever -- certainly an analysis that gets us ahead of most casual option traders. But let's take the analysis even further.

This time, we will do the exact same back-test, but we will only look at earnings. Specifically, we will short the put two-days before earnings, let earnings happen, then close the option position two-days after earnings.

Here are those results for the same 30 delta short put:

short 30 Delta Put
* Trade Frequency: 30 Days
* Back-test length: two-years
* OnlyTrade Earnings

Gross Gain: $98
Gross Loss: -$63
Wins: 6 Losses: 2

Short Put Return:  6

While Selling an uncovered put in Flagstar Bancorp Inc during earnings did prove to be a winner, more importantly, it returned less than the same short put that avoided earnings. While this clever use of avoiding earnings has outperformed the short put that was held during earnings, there's a bigger picture here. Let's turn to that piece, now.

Moving through the analysis on Flagstar Bancorp Inc (NYSE:FBC) has done more than show us returns, it has revealed that the concept of expertise in options has been made made overly complex. The point is simple: having the knowledge before placing a trade shapes the thought process about what to trade, when to trade it and even if the trade is worth it at all. Here's how all this works in real-life, beyond Flagstar Bancorp Inc and short puts.