Options Trading and Stock Market Investing: Your Questions Answered
Hello, traders and investors!
Today I would like to answer a few questions about stocks and options.
Question: Knowing that the implied volatility of an option will increase as an earnings report approaches, and that should increase the value of the option, should I buy a call and a put 3 weeks before earnings and sell it the day before earnings?
Answer: It sounds like you're considering buying a straddle or a strangle before earnings, in anticipation of an increase in implied volatility as the earnings day gets closer, and then selling right before earnings. There's a video that addresses this topic:
Long Volatility into Earnings?
Their study concluded that this strategy only has a 43% win rate and loses money if done repeatedly (though you might get lucky if you do it once or twice). The reason the strategy doesn't work is because everything (including the fact that volatility will increase leading up to earnings) is already priced into the option price.
Question: Could I instead hold on to the straddle or strangle through earnings?
Answer: Keeping the trade going after the earnings event is a hit-or-miss strategy, as I've seen too many earnings events, including highly anticipated ones, result in surprisingly little price movement. Today's Tesla earnings report (August 3, 2016) is a good example of that; the stock price wobbled a little bit but hardly moved much.
Question: Would you recommend buying calls for 52-week-low high-quality companies?
Answer: In regard to scanning for blue-chip companies that are experiencing a 52-week low, that's actually not a terrible idea, but it's not my approach. I'd much rather watch a small handful of companies every day and become an "expert" in those companies and their price movements, than continually scan for companies that happen to be in a 52-week low but I don't know much about the company, its fundamentals, its products and services, it's typical price range and movements, etc. I really like the idea of focusing on a few stocks that I really like to follow and that I'm really familiar with, rather than betting money on a stock just because it's hitting a 52-week low.
I hope that these answers are helpful to you. If you would like a consultation to set up a trading plan or just to get you focused and answer your questions about trading or investing, feel free to contact me at davidmoadel @ gmail . com anytime.
Thanks and hope to hear from you soon,
David Moadel, M.Ed.
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