A recent study showed that stocks decreased an overwhelming percentage of the time after their earnings report. Knowing this, how did buying puts before the earnings release perform?
We conducted a study using data from 2014 to present. We chose stocks with a price greater than $20 and an open interest on the at-the-money (ATM) put of more than 500 contracts. We bought the ATM put in the closest expiration. We opened the trade at the closing price before the earnings announcement (end of the trading day) and closed the trade immediately after the announcement (the next morning).
A table of the results of buying the ATM Put before earnings was displayed. The table included the average premium paid, average P/L and the percentage of profitable trades. The table showed that even though the stock price went down (at least a penny) more than average, the trade could not make back the premium paid for the option 65% of the time.
A return distribution was displayed. The graph showed that although the strategy was profitable, it was only due to a handful of winners. If we took out just 5 of the high outlier trades we would have missed out on 20% of our profits, which meant the strategy would have lost money. The increase in implied volatility (IV) going into this binary event and decrease afterward worked against us.
For more information on long premium into earnings check out these segments:
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on buying puts going into earnings.
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