Is buying calls a week or two before earnings then selling just before the underlying publishes the report a good strategy if it's anticipated that the underlying will report good earnings? I've noticed this with the upcoming NVDA earnings, a lot of buying in anticipation of good earnings, but do other stocks react this way to positive expectations? This makes sense to me that it would be a good strategy since positive expectations tend to lead to a lot of buying.
Like the almighty Warren Buffett said, buy the rumor sell the news.
Posted by OJpopsicle
5 Comments
mmm good earnings could already be priced in. 🤔
The short answer is no. the market prices options to break even, so if you can buy a call a week ahead of earnings for $10, then the market expectation is that it will also be worth $10 the day before earnings, the day after earnings, and at expiration. While this isn’t *exactly* correct due to the impact of the risk-free rate, it’s close enough for short-term earnings trades like this.
However, the long answer is yes, *if you have a reason to believe the market is wrong*. The market also knows that IV rises as earnings approaches, so it’s factored in…or at least it should be based on the tick-by-tick investing decisions are being made. You may look at the surface and come to the conclusion that IV will go up *more* than the market is pricing, in which case *buying* puts and/or calls can give you a statistical edge. If you feel the market is overpricing the rise of IV, then you could sell.
But, like pretty much everything else with options, you shouldn’t blindly follow a strategy without gauging the market sentiment first.
Not really as alot of stocks decline before earnings. Better is research previous earnings and see what was average behavior although thats no guarantee
Its all a Question of what is the risk, calculate the risk and have stop loss.
Why do amateurs only think in term of how much profit they can make and it usually doesn’t occur to them how much risk they are taking on until it’s too late and they suddenly go oops?
Some stocks, such as NVDA, have a strong history of running up into earnings. Nothing is for certain, but If you can couple that with quality chart and/or company analysis and early whispers of a strong next earnings report, there’s potential money to be made there.
That said, with your strategy in mind, while NVDA stock was recently depressed, it’s also up ~30% in the last 2-3 weeks. Not calling tops or bottoms here — I have no idea how this will play out — and knos know by now that NVDA’s been a tough stock and company to be truly bearish on for the last few years.
If you pursue this strategy, buying call options that expire after earnings may be the way to go, since those options should retain extrinsic/resalevvalue quite well .