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Successful Earnings Option Trading: First Bancorp (NYSE:FBP)

First Bancorp, FBP, earnings, long put


First Bancorp (NYSE:FBP) : Option Trading Puts for 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.



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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 FBP. Let's look at a two-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 two-years of history.

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Now we can peruse the results.

RESULTS
If we did this 30 delta long put in First Bancorp (NYSE:FBP) over the last two-years but always skipped earnings we get these findings:

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

Gross Gain: $190
Gross Loss: -$120
Wins: 8 Losses: 17

Long Put Return:  175
Stock Return:  -11.6

Option Out-performance  186.6

First we note that the long put strategy actually produced a higher return than the stock 175.0% versus -11.6% or a 186.6% out-performance.

Buying a put every 30-days in FBP has been a pretty substantial winner over the last two-years returning  175%. Even better, the strategy 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: two-years
* OnlyTrade Earnings

Gross Gain: $3
Gross Loss: -$18
Wins: 1 Losses: 3

Long Put Return:  -24

Buying an uncovered put in First Bancorp 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.

TRADING TRUTHS
Moving through the analysis on First Bancorp (NYSE:FBP) 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.

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 empowers you to do is find calm, low-stress stocks and ETFs and then identify the option strategies that have created a high percentage of winning trades, gaining profitability slowly, while managing earnings.

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