Federal Realty Investment Trust (NYSE:FRT) : Trading Options During EarningsDate Published: 2017-04-21
We're going to examine buying and selling out of the money strangles in Federal Realty Investment Trust and find out once and for all what the winning trades have been during earnings releases.
With the right tool kit it's easy to find an explicit answer: Buying out of the money strangles during earnings for Federal Realty Investment Trust has been a winner. This is the information that the top 0.1% have and now it's time for us all to see it.
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By definition trading options during earnings is very risky. But, once we step into that world, in turns out that there is a lot less 'luck' involved in successful option trading than many people have come to understand.
We can get specific with long earnings strangles for FRT in this dossier. Let's look at a two-year back-test of a long 20 strangle only held during earnings. Here are the rules we followed:
* Test monthly options, which means we are not trading the weekly options (we could so if we chose).
* Only hold the position during earnings. Specifically, we test initiating the position two-days before the earnings event, then hold through earnings, and then close two-days after.
* Test the out of the money strangle -- specifically the 20 delta strangle.
* Test the earnings strangle looking back at two-years of history.
More than all the numbers, we simply want to walk down a path that demonstrates that it is actually quite easy to optimize our trades with the right tools. In the set up image below we just tap the rules we want to test.
Next we glance at the returns.
If we did this 20 delta long strangle in Federal Realty Investment Trust (NYSE:FRT) over the last two-years but only held it during earnings we get these results:
We note that while FRT stock out-performed this earnings strangle, we're looking at just a matter of days of holding period for the options and two-year for the stock.
An earnings event is really just a volatility event that we know is coming ahead of time. What we're really analyzing here is if, historically, the option market has priced the implied stock move too high or too low.
In this case, the option market's implied vol has been lower than the actual stock movement. We can see that a long strangle and only holding the position during earnings in Federal Realty Investment Trust returned 261.3%. But, there's a much bigger picture here. Let's turn to that piece, now.
CHARTING TO BE CLEAR
To make it clear, we can simply plot the returns of the short and long out of the money earnings strangles, below.
Federal Realty Investment Trust Earnings / Non-Earnings Strangles %
The concept here is straight forward, friends: securing knowledge before entering an option position constructs a mind set about what to trade, when to trade it and even if the trade is worth it at all. Now we can see this practice taken further, beyond Federal Realty Investment Trust and earnings strangles.