Monday, July 26, 2010

The Rare Earnings Win-Win

Every once in a blue moon an earnings reaction comes along which provides a favorable outcome to both volatility buyers and sellers alike. It's not often that both types of players come out unscathed. Typically one of these camps is enriched while the other gets shafted.

Not the case with AMZN this go around. The online retailer seemingly provided goodies to all earnings players this season. Provided of course they had the right timing on their exits. Those buying vol pre-earnings via straddles and strangles would have been well served by adopting the ole' knee jerk take the money and run approach following the monster gap down. With a 10+% gap and the pre-earnings 120 ATM put option gaining $15 intrinsic value, you can bet straddles increased in value from Thursday to Friday. Given the immediate buying surge off the open, straddle owners would have been better off with a swift exit (click image to enlarge).

[Source: MachTrader]

Those selling vol pre-earnings via anything from iron condors to short strangles would have been well served by exercising some patience and allowing the gap fill to assuage their initial financial pain. As the day progressed the gap fill would have not only alleviated some of the accumulated morning losses, but likely turned them into profits. Let this serve as an example supporting patient reactions over perfunctory.

If you're inclined to play earnings and aren't already watching the intraday price action following the announcement, I would highly recommend it. Using a 5 minute chart to gauge whether the gap is initially bought up or sold into can aid in assessing whether to hold your position a bit longer or simply jump ship.

For related posts, readers can check out:
Earnings Season Primer
INTC...The Aftermath
Lessons Learned from a Trip to the Woodshed

1 comment:

Investment research directory said...

I would like to comment about stocks under five dollars. Their are many stocks under five dollars that are really great values but one must have the time and put the effort into finding them. A very good example of this is apple computer the stock traded under five dollars in 1998 today its trading over 400 dollars a share. This is just one example. Another example is ford motor the stock traded at just 1 dollars about three years ago it now trades at 10dollars. These are just a couple of examples their are many others.