Do you know anyone on the board of Apple, or Google, or Microsoft?
Do you know anyone that's even high up in those companies? If you do, add a comment to this post right away and let us know. But chances are you don't and so earning season for a lot of stocks is going to come with a lot of volatility.
Volatility about future projections, past performance, pricing and product selection. So much volatility that it can undoubtedly be one of the most fearful times of the year for investors.
So how can you use options to take advantage of earnings season and calm your fears with hedging? Well I like to use weekly options.
The Growing Popularity of Weekly Options
Weekly options have been growing in popularity because of their short-term hedge, in lieu of a contract that's more expensive and requires more time. These traditional monthly contracts, while great, don't offer any real advantages over weekly options when we talk about earnings season and hedging.
You see, with monthly contracts you have to buy and hold for possibly two to three weeks before the earning report even happens. Sure you could buy the contract the week before, but if you want to get a true hedge, then you'll actually have to buy the contract well in advance of the actual report. This is because companies may actually trade much more before the report of the earnings then they will after.
An Uncommon, But Classic Earnings Example
It's not uncommon for companies like Google, pictured below, to actually have stellar earnings, earnings that knock the ball out of the park and yet they gap lower on earnings because it had already been priced in.
In fact in Google's case above, the earnings were priced in and then some before the announcement. Google beat earnings estimates but analysts had come to expect even more and as a result the stock sold off for the next week.
The point here is that you really never know what will happen after earnings are announced. Even good earnings can still make investors run for the exits.
What Strategies Should You Use?
Well there are two strategies that I typically like to use with weekly options; strangle or straddle.
With these strategies you're going to be buying two contracts, both a call and a put. And that's going to give you protection on both sides of the announcement whether the stock rallies dramatically, or whether the stock tanks after the announcement.
The only difference between them is that you'll be either buying the same strike price, or separating out your strikes a little bit. But this is a great way to add a non-directional hedge that will completely calm your earnings fears right before the announcement.
What Do You Do AFTER Earnings?
Well after you know the news has come out, whether the market has moved up or down or not even moved at all, you have to realize that this has all been a hedge and it's time to get out of the position.
It's over, it's done, you're not playing this as a speculated bet, so get out of your weekly options before they decay in value to the point at which they're not worth anything.
Hopefully you've made money, but again, if you haven't take what money you put into the market as a hedge and realize that you could have lost a lot more if you didn't have this hedge all! Better to be safe than sorry right.
Have You Used Weekly Options As A Hedge?
Add your comments below and let me know how you used weekly options around earnings season. Do you speculate on stock movement?
Do you only use the put side, or do you use as a strategy like the straddle and strangle that I mentioned above. Again, add your comments to this post and let us know your thoughts.