Regeneron Pharmaceuticals Inc (NASDAQ:REGN) : The Wonderful Secret to Options Trading Before Earnings
Date Published: 2017-05-11
There is a wonderful secret to trading options right before earnings announcements in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) , and really many stocks, that benefits from the rising implied volatility but avoids the risk into the actual earnings release and also avoids any kind of stock direction risk.
This approach has returned 26.5% with a total holding period of just 40 days, or an annualized rate of 242%. Now that’s worth looking into.
Everyone knows that the day of an earnings announcement is a risky event for a stock. This can be explicitly seen in the option market, where the implied volatility (the expected stock move) rises into the earnings event.
The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies like Regeneron Pharmaceuticals Inc (NASDAQ:REGN) the answer is actually, yes.
THE WONDERFUL SECRET
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, is two-fold: (i) to benefit from that known implied volatility rise, and (ii) to own the straddle for a very short period of time when the stock might move ‘a lot,’ but taking no earnings bets.
If either of those two phenomena occur, there’s a very good chance this wins, if neither occur, the amount risked is normally quite small.
Here is the setup:
We are testing opening the position 6 days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making
any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
If we did this long at-the-money (also called ’50-delta’) straddle in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) over the last two-years but only held it before earnings we get these results:
We see a 26.5% return, testing this over the last 8 earnings dates in Regeneron Pharmaceuticals Inc. That’s a total of just 40 days (5 days for each earnings date, over 8 earnings dates). That’s an annualized rate of 242%.
We can also see that this strategy hasn’t been a winner all the time, rather it has won 5 times and lost 3 times, for a 63% win-rate and again, that 26.5% return in less than two-full months of trading.
As important is that not only did the strategy win more often that it lost (5 wins, 3 losses) but
the average win was $1,780 and the average loss was $847 (using a 5-lot straddle).
When a stratgy wins more often than it loses, and the average of a winning trade is actually larger in dollars than
the of a average losing trade, you end up with these outsized gains.
MORE TO IT THAN MEETS THE EYE
While this strategy is benefiting from the implied volatility rise into earnings, what it’s really doing is far more intelligent.
The option prices for the at-the-money straddle will show very little time decay over this 5-day period,
so what this strategy really does is buy “five days” of potential stock movement with what is actually
fairly small downside risk.
This is it — this is how people profit from the option market. A few clicks of preparation makes all the difference in the world.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Thanks for reading.
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
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