Monkey Throw Dart: Pre-Earnings Straddling of Nvidia (Part Dos of Dos)

Friday, May 10, 2013

Pre-Earnings Straddling of Nvidia (Part Dos of Dos)


This is the third time that I've either strangled or straddled NVDA to showcase my favorite options strategies.  The first time was the big winner with a 70% gain in five days.  The second time resulted in  a 2.5% loss.  This time I got the 2.5% back in the last day of the trade.   I consider that slightly more of a "Woo-Hoo!" than a "Doh!" in Homer-speak.

 The gain occurred in the last day (earning day) which happens as uncertainty peaks.  Sometimes it pays to hold to the very last few minutes before the earnings announcement is made which was the end of the trading day on Thursday.  The chart below illustrates the price action of the call and put compared to the stock price.
 
 
Notice on the last day (red circle) where the stock price didn't move much but both the call and put both moved up slightly.  That's the implied volatility going to work and turning an initial $32 call into a $36 call, and turning an initial $48 put into a $46 put.  Nothing to brag about, but a gain is a gain after combining the final price of the call and the put.

 The mistake that is often made when using options strategies around earnings is to assume that a large move in the stock price after earnings will result in an overall gain.  In this case, look at what would have happened if you sold your straddle the day after the earning announcement.

 Notice in the chart below that the implied volatility has plummeted post earnings ...
 
 
As the chart below shows, the stock price of NVDA actually rose 4.5% after a good earnings result.  This caused the call to shoot up to $56, but the put, without the benefit of the pumped up implied volatility, is now worth only $3. 


Your initial $80 investment was worth $82 if sold just before the earnings announcement (+2.5%), but is now worth only $59 the day after the earnings announcement. (-26.3%).

Related Post: Pre-Earnings Straddling of Nvidia (Part Uno of Dos)