Wednesday, 30 May 2012

HOW TO TRADE OPTIONS BEFORE RESULTS


Every quarter, Indian. companies announce their latest earnings and sales results. Sometimes, this information is entirely in line with expectations and the market basically shrugs its collective shoulders. At other times, however, a company unleashes an earnings surprise, and the stock market reacts in a decisive fashion. Sometimes, the reported results are much better than expected - a positive earnings surprise - and the stock reacts by advancing sharply in a very short period of time to bring the price of the stock back in line with its new and improved status. Likewise, if a company announces earnings and/or sales that are far worse than anticipated - a negative earnings surprise - this can result in a sharp, sudden decline in the price of the stock, as investors dump the shares in order to avoid holding onto a company now perceived to be "damaged goods"...............

Either scenario can offer a potentially profitable trading opportunity via the use of an option trading strategy known as the long straddle. Let's take a closer look at this strategy in action.
The Mechanics of the Long Straddle
A long straddle simply involves buying a call option and a put option with the same strike price and the same expiration month. In order to use a long straddle to play an earnings announcement, you must first determine when earnings will be announced for a given stock. You might also analyze the history of the stock itself to determine whether it is typically a volatile stock and if it has previously had large reactions to earnings announcements. The more volatile the stock and the more prone it is to react strongly to an earnings announcement, the better. Assuming you find a qualified stock, the next step is to determine when the next earnings announcement is due for that company and to establish a long straddle before earnings are announced.





Timimg :
You should take your position 3-5 days prior to results as option price increases prior to 1-2 days of such event.

6 comments:

  1. The article is well written and i think everyone should have to think about this while investing in Nifty. I am using the Nifty Tips by shared by you and these are very accurate.

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  2. thanks nifty tips for showing interest in our option call put trading tips

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  3. g8 blog...I have been looking for this for a while. I found articles related to share market on but not so useful. I have read each and every bit of it of this post and feel like all the information on option trading is here. Thanks for taking your time to post such informative articles. Good one!

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  4. I’m impressed, I have to say. Really rarely do I discover a blog thats both informative and entertaining, and let me tell you, you have hit the nail on the head. Your post is important; the matter is something that not many people are talking intelligently about. I am really happy that I stumbled across this in my search for something relating to it.

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    1. Thanks .i m glad to know that you liked our blog .keep reading for more such articles

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  5. Hello Nishita,

    Nice to meet someone specializing in Options!!!

    Well, I read all your articles on a regular basis. In this article of trading before earnings, u have written a wonderful strategy of Straddle to be used.

    When we expect high volatility I believe buying long strangles would also be helpful.

    One thing I would like to request you which will make this blog much more effective.

    Nishita, whenever you are giving some theoretical concept, say like straddle/strangle please explain it with some historical example also. For eg. in strangle or straddle you can post example of Infosys(April 13 series) and Unitech (May 13 series).

    One more thing, I dont know whether readers are allowed to post their recommendations/observations in your blog, please do tell.

    Regards,

    Kishore-Pune

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