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Successful Earnings Option Trading: Fortune Brands Home & Security Inc (NYSE:FBHS)




Fortune Brands Home & Security Inc (NYSE:FBHS) : Option Trading Puts for Earnings

Date Published:

PREFACE
As we look at Fortune Brands Home & Security 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.

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STORY
There's actually a lot less 'luck' involved in successful option trading than many people realize. We'll get specific with short puts on FBHS. Let's look at a three-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 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.

RESULTS
If we did this 30 delta short put in Fortune Brands Home & Security Inc (NYSE:FBHS) over the last three-years but always skipped earnings we get these findings:

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

Gross Gain: $1,378
Gross Loss: -$818
Wins: 36 Losses: 7

Short Put Return:  56.3
Stock Return:  37.6

Option Out-performance  18.7

First we note that the short put strategy actually produced a higher return than the stock 56.3% versus 37.6% or a 18.7% out-performance.

Selling a put every 30-days in FBHS has been a pretty substantial winner over the last three-years returning  56.3%. Even better, the strategy has outperformed the short put that was held during earnings. Let's turn to that piece, now.

GOING FURTHER WITH FORTUNE BRANDS HOME & SECURITY INC
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: three-years
* OnlyTrade Earnings

Gross Gain: $260
Gross Loss: -$185
Wins: 7 Losses: 4

Short Put Return:  5.6

While Selling an uncovered put in Fortune Brands Home & Security 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.

TRADING TRUTHS
Moving through the analysis on Fortune Brands Home & Security Inc (NYSE:FBHS) 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 Fortune Brands Home & Security Inc and short puts.