I’m starting to do this type of trade more often. The day after earnings are released, when earnings news specific to the underlying equity shouldn’t offer a surprise before my option expires, I like to sell naked puts. That’s what I did with Intel (INTC) today.
Obviously, the premium would have been much better if I had sold the options prior to earnings announcement, but I would have taken on more risk than needed. I’m not saying this is a hard rule for me, but something I’ve done more than a few times and it has worked. You’d think the premiums would drop so fast that you couldn’t take advantage of the change in factors (ie, earning are no longer an unknown and volatility should drop), but I’ve seen it fairly often that in the first hour or two investors are still digesting the news and while premiums drop, it’s not as much as maybe they “should”.
Ideally one should sell naked puts early in the day if you are trying to work this angle. Some extra risk is added in that some stocks work off their short positions with a spike early and fall back soon after. That’s what you have to watch. You can generally tell in the first 15-20 minutes if the gapped up open will be a head fake and the stock is just working off excess shorts and will resume its previous trend.
I missed the low this morning on INTC’s drop after the spike and also missed most of the “left over premium” I was targeting. My boss was hanging around the recruiting floor and actually sat behind me for a while. Once he stepped away, I got back to investing, aka slacking. While INTC was trading at 22.13 (down from the opening high, but up from the day’s low) I sold four May 21 naked puts (NQQU) and received $211.25 after commissions. I considered selling at the May 22 strike, but decided to take a little extra risk out of the picture. Just because earnings are released doesn’t mean that external factors can’t bring INTC right back down.
Since you know I always check the chart before I trade, I’ll mention my thoughts there too. INTC gapped up (very bullish) and moved back above the 10, 20 and 50 day moving averages (all bullish signs). The bearish hint to the chart is that when INTC got back up to its 100 day moving average, it stopped its accent. The 50 day mentioned above is just under 21 and I’m banking on it being support on the way down if INTC retreats. If INTC can get above the 22.50 range, it could be poised for good bullish run.
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