Successful Earnings Option Trading: Fortress Biotech Inc (NASDAQ:FBIO)

Fortress Biotech Inc (NASDAQ:FBIO) : Option Trading Puts for Earnings

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As we look at Fortress Biotech Inc 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.

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There's actually a lot less 'luck' involved in successful option trading than many people realize. We'll get specific with long puts on FBIO. Let's look at a three-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 three-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 long put in Fortress Biotech Inc (NASDAQ:FBIO) over the last three-years but always skipped earnings we get these findings:

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

Gross Gain: $460
Gross Loss: -$323
Wins: 13 Losses: 21

Long Put Return:  43
Stock Return:  -5.6

Option Out-performance  48.6

First we note that the long put strategy actually produced a higher return than the stock 43.0% versus -5.6% or a 48.6% out-performance.

Buying a put every 30-days in FBIO has been a pretty substantial winner over the last three-years returning  43%. Even better, the strategy has outperformed the long put that was held during earnings. Let's turn to that piece, now.

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: three-years
* OnlyTrade Earnings

Gross Gain: $30
Gross Loss: -$70
Wins: 4 Losses: 6

Long Put Return:  -11.5

Buying an uncovered put in Fortress Biotech Inc during was not only a loser, more importantly, it returned less than the same long put that avoided earnings. While this clever use of avoiding earnings has outperformed the long put that was held during earnings, there's a bigger picture here. Let's turn to that piece, now.

Moving through the analysis on Fortress Biotech Inc (NASDAQ:FBIO) has done more than show us returns. 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 Fortress Biotech Inc and long puts.