It has caught my attention that stocks with big drop after earnings have the tendency to rebound on the next day.
Recent examples are ISRG, BIDU, FSLR.
If we check the options of the ATM put, we found that the value of the put drops a lot. Need to find out what are the causes of the decrease in value.
IV drop could be one of the reason.
For example, this morning, the high of FSLR Nov 09 strike 125 put was 8.3. It dropped to around 5.
If one has enough margin in the account, he can sell the put and buy back later for profit (3.3/8.3 = 39%.)
Another choice is to sell Bull put (125, 120), the best entry price is 2.7 and the best exit price is 1.5. (1.2/1.5=80%)
Of course, the above is the ideal situation. The gain will not be so much in real trades. However, 10-20% should not be impossible.
One other thing we need to do before doing this type of trades is secondary exit.
The obvious answer is stock ownership. The issue is that whether we want to own a stock with bad earnings.
Please give your thought on this type of trades. It could be very profitable.
There are still earnings next week, let's get prepared for them.
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Joseph,
ReplyDeleteMy thoughts are as follows:
o Volatility Crush is definitely a good portion of the drop in value of the put. We can actually calculate it if we know the Vega and the IV values before and after.
Another key reason for the put value to go up is because investors drove the price down too far and bottom fishing takes over. The price went up in the afternoon. It is all emotions.
o Personally, I will hesitate on placing a naked put or bull put on a bad news. Normally, it is better to wait for some support or clearer reversal signal. If it is a bear market, the trade could go further down. Fortunately, the market bounce off the 50 day MA in a bullish market we are currently in. But if you are day trading, it is probably possible to make 20% because you have IV on your side and a short technical rebound from a very oversold situation. Normally, the stock will go back to its formal low. So it is necessary to take profit fast.