Stock Option Advisory

Company Earnings and Stock Options Straddle

In at least one way, the stock market is similar to flying an airplane, a tedious and boring long period of time followed by a very chaotic and stressful short period of time. A lot of the stock market’s chaotic moments are a result of companies reporting their quarterly earnings.

A poor earnings report can send a company’s stock into a nosedive and conversely a good earnings report can send a company’s stock into the stratosphere.A useful strategy for taking advantage of chaotic earnings reports is the long straddles stock options position, buying long calls stock options and long puts stock options with the same strike price and at-the-money.

The stock market has a tendency to underestimate the risk of holding equities, and the long straddles stock options position can be useful for taking advantage of the market’s “blind side”. Due to the timing for companies closing their books for a quarter, there is a tendency for companies to report their earnings in close proximity time-wise. This close time-wise tendency is known as “earnings season”.

The primary stock options expiration months to consider for employing a stock options earnings long straddles position as a result of earnings season are: February, May, August and November. Secondary (fewer companies reporting) stock options expiration months to consider for stock options earnings straddles are: January, April, July and October.

We back tested a long straddle strategy with PowerOptions new SmartHistoryXL Back Testing tool, by selecting stock options positions on July 24, 2006 with stock options expiration on August 18, 2006 (August stock options expiration day). We selected stocks from the technology sector, as these stocks historically tend to be very volatile with respect to earnings season. Additionally we selected stock options positions with a probability sum of greater than 40%, with strike prices within 1% of the price of the stock and with an earnings date between July 24, 2006 and stock options expiration. The results of the back test are shown below:

Results for Long Straddle search on July 24
Stock
Sym
Stock
Price
7/24/2006
Call
Strike
&Month
Call
Sym
Call
Ask
Put
Strike
&Month
Put
Sym
Put
Ask
Stock
Price
8/18/2006
%
Ret.
BOBJ 20.07 06 AUG 20 BBQHD 1.20 06 AUG 20 BBQTD 1.05 27.53 234.7
CZN 12.52 06 AUG 12.5 CZNHV 0.30 06 AUG 12.5 CZNTV 0.25 13.51 83.6
KLAC 39.80 06 AUG 40 KCQHH 1.80 06 AUG 40 KCQTH 2.00 45.31 39.7
AMT 32.27 06 AUG 32.5 AMTHT 1.10 06 AUG 32.5 AMTTT 1.25 35.61 32.3
IDNX 7.51 06 AUG 7.5 IDXHU 0.35 06 AUG 7.5 IDXTU 0.40 6.74 1.3
LMS 24.80 06 AUG 25 LMSHE 1.70 06 AUG 25 LMSTE 1.85 28.33 -6.2
AMX 35.05 06 AUG 35 AMXHG 1.75 06 AUG 35 AMXTG 1.60 38.01 -10.1
SBAC 22.61 06 AUG 22.5 QYSHX 1.35 06 AUG 22.5 QYSTX 1.15 24.36 -25.6
NIHD 54.94 06 AUG 55 QHQHK 2.95 06 AUG 55 QHQTK 2.90 51.20 -35.0
XING 10.10 06 AUG 10 QAEHB 0.85 06 AUG 10 QAETB 0.90 11.12 -36.0

# Successful positions: 5 out of 10 (50%)
Avg. % Return: 27.9%

Analysis
The company earnings stock options strategy returned a whopping 27.9% in only 26 days with a success rate of 50%. The bulk of the return was generated by one position, BOBJ, with a return of 234.7%.

PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a long straddle investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing long straddle options positions.

[tags]stock options, long straddles, option income, investment strategy, long calls[/tags]

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