During recent discussions with our investors, we’ve once again encountered questions about our strategy. Given that we’re currently in earnings season, let’s break down two of our recent trades.
Four times a year, companies listed on U.S. stock exchanges report their quarterly earnings, and for us, this is a period that offers the opportunity to quickly achieve profits and close a trading position much faster.
Zde je anglický překlad vaší věty:
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CASE ONE: AMZN
Amazon needs no introduction. Instead, let’s briefly look at the reasons for selecting this stock for an earnings play trade. AMZN reported its most recent earnings on Thursday, February 1st, after the market closed. On that day, the stock traded in a range of approximately $155 to $159, which was about 15% below its all-time high. If we compare Amazon's chart with other stocks in the so-called Big Seven, AMZN was, so to speak, lagging behind. MSFT was at historical highs, META too, NVDA was moving steadily upwards, and GOOGL was near its peak. NFLX was below its high, in a situation similar to AMZN.
So, if any company needed to catch up with the top stocks in the S&P, it was AMZN and NFLX.
Additionally, two days before AMZN, GOOGL also reported, and there were excellent results in their cloud business segment. This increased the likelihood that Amazon's AWS cloud business would also show growth.
Amazon continuously expands its activities, such as its own package delivery service, which is already significantly cutting into FedEx's market share. Its strongest areas are still online retail, third-party services, cloud, physical stores, advertising, subscriptions, and more.
The rationale for opening a position was that there was a higher probability of the stock price moving either up or sideways rather than down. Therefore, I decided to write a PUT option. Next came the selection of the strike price and expiration. Personally, I usually choose between the two nearest expirations for earnings plays, because the day after earnings are announced, the implied volatility drops significantly, especially on the nearest expirations. Investors already know the results, so the market tension from anticipation eases, option prices fall, and we have the opportunity to quickly exit the trade and buy back the option at a much lower price. The further out the option's expiration, the less the implied volatility changes after earnings because the stock still has time to make larger moves.
However, in this case, I chose a more distant May expiration and a strike price much closer to the current stock price due to the reasons mentioned above regarding the expected stock price movement. The combination of the 150 strike and expiration offered a $660 credit per contract, or per sale of one PUT option. What a PUT option means and how its sale (or writing) works can be read in an older blog post or later in our upcoming online trading course, which will soon be available on this website.
I opened the position on February 1st at 19:16. The earnings results after the market close were indeed excellent, and AMZN opened the next trading day at $167. The stock price thus moved away from our written PUT, reducing the probability that the stock price would be below 150 at expiration. Additionally, volatility dropped after earnings, which meant that the price of our option fell from $660 to $250 per contract. I closed the position on February 2nd at 17:50 with a profit of $410 per contract. From the maximum possible profit of the written option upon expiration in 4 months, I took 62% overnight.
If we want to calculate the result as a percentage of the investment, we must consider the margin amount blocked by the broker in case the written option is assigned into shares. Brokers typically block around 20% of the assignment price, so 20% of $15,000 per contract = $3,000. Our one-day profit thus represents a 13.5% return on the invested (blocked) amount, which translates to an annualized return of 4,927.5%.
Four times a year, we have the opportunity to achieve rapid returns literally overnight.
CASE TWO: AMD
AMD also needs no introduction. I chose this example to demonstrate the use of a position called a short strangle. For reference, the position described in the AMZN example was a short naked PUT. AMD reported on January 30th, and the price before the close was around $170. AMD is also riding the AI wave, but on the day of the earnings announcement, it had a P/E (price to earnings) multiple of 1,400. In other words, this means that at the current price and company earnings, your investment would take 1,400 years to return. Crazy, right? In the last quarter, AMD doubled its net profit, so the P/E dropped to the current 325, but even that means the company is very expensive at its current valuation.
The rationale for this position was that I didn’t expect another significant upward move. With such a high valuation, no major institutional investor would likely make a significant investment in AMD; rather, I would expect some profit-taking. The basis was again writing an option, at the 140 strike, expiring on March 15th. This combination offered $190 per contract. The written PUT option, if assigned, would mean a long position in the stock at $140, which I wouldn’t mind holding long-term.
Given the higher probability of price stagnation or decline, I supplemented the position with a written CALL option at a distant 240 strike, which added another $110 per contract to the position, totaling $300 for the short strangle position per contract.
AMD reported good results, beating revenue estimates but slightly missing earnings per share estimates. As a result, AMD dropped to about $166 the next trading day, and this modest move was favorable for both legs of our position. I closed the entire position with a profit of $156 per contract, which was 52% of the maximum possible profit from the position in one day.
If you want to learn more about our options strategies, you can follow all our trading orders in the members’ section or learn our options strategies in the online course. Stay tuned to our website for more information.
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