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Successful Earnings Option Trading: First Bancorp (NASDAQ:FBNC)




First Bancorp (NASDAQ:FBNC) : Option Trading Long Puts and Earnings

Date Published:

PREFACE
As we look at First Bancorp we note that a long put is one of the most common implementations of an option strategy, but the analysis completed when employing the long 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.

STORY
There's actually a lot less 'luck' involved in successful option trading than many people realize. We'll get specific with long puts on FBNC. Let's look at a one-year back-test of a long 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 long put looking back at one-year 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.

RESULTS
If we did this 30 delta long put in First Bancorp (NASDAQ:FBNC) over the last one-year but always skipped earnings we get these findings:

long 30 Delta Put
* Trade Frequency: 30 Days
* Back-test length: one-year
* Always Avoid Earnings

Gross Gain: $278
Gross Loss: -$250
Wins: 3 Losses: 12

Long Put Return:  6.9

Buying an uncovered put every 30-days in FBNC has been a modest winner over the last one-year returning  6.9%. But, as modest as the gains have been, this clever use of avoiding earnings has outperformed the long put that was held during earnings. Let's turn to that piece, now.

GOING FURTHER WITH FIRST BANCORP
Just doing our first step, which was to evaluate the long 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 long 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 long put:

long 30 Delta Put
* Trade Frequency: 30 Days
* Back-test length: one-year
* OnlyTrade Earnings

Gross Gain: $0
Gross Loss: -$15
Wins: 0 Losses: 3

Long Put Return:  -3.7

While Buying an uncovered put in First Bancorp was modestly positive, taking on extra risk by actually holding a long put position during earnings did worse. Yep, taking on more risk yielded worse returns. There's actually a bigger picture here. Let's turn to that piece, now.

TRADING TRUTHS
Moving through the analysis on First Bancorp (NASDAQ:FBNC) 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 First Bancorp and long puts.