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Intelligent Options Trading: Right After Earnings in Facebook Inc



Facebook Inc (NASDAQ:FB) : Intelligent Options Trading: Right After Earnings

Date Published:

Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.


LEDE
This is a simple option trade that starts two-days after Facebook Inc (NASDAQ:FB) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.



Facebook Inc (NASDAQ:FB) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that's the distraction when it comes to the option market.

For Facebook Inc, irrespective of whether the earnings move was up or down, if we waited two calendar days after the stock move, and then sold a one-month out of the money put spread, the results were simply staggering. We use two-days to allow the stock to fully reach equilibrium post earnings.

We can examine this intelligent approach, objectively, with a custom option back-test. Here is our earnings set-up:



Rules
* Open short put spread 2-days after earnings
* Close short put spread 29 days later
* Use the 30-day options

RETURNS
If we sold this 30/10 delta out-of-the-money put spread in Facebook Inc (NASDAQ:FB) over the last three-years but only held it after earnings we get these results:

FB: Short
30 Delta / 10 Delta
Put Spread

% Wins: 58%
Wins: 7 Losses: 5
% Return:  16.2% 
% Annualized:  18% 

Tap Here to See the Back-test


We see a 16.2% return, testing this over the last 12 earnings dates in Facebook Inc. That's a total of just 336 days (28 days for each earnings date, over 12 earnings dates).

We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost 5 times, for a 58% win-rate.


Setting Expectations
While this strategy had an overall return of 16.2%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 1.84% in just 27-calendar days.

MORE TO IT THAN MEETS THE EYE
While a short put spread is a strategy that gains profits if the underlying stock "doesn't go down a lot," there is more to this with Facebook Inc.

This strategy is not a silver bullet, it does not take on the risk of earnings, and while it's slightly bullish, it really isn't a stock direction investment either. In many ways, earnings results are just a coin flip -- and we are not interested in flipping coins with option strategies.

We can see that this idea has been a winner more times than it has been a loser -- a 58% win-rate. It's that positive win-rate that has created that large 18% annualized return.

WHAT HAPPENED
This is it -- this is how people profit from the option market -- it's not about guessing; ever.