There is an advanced option trade in GoPro Inc (NASDAQ:GPRO) before earnings that takes no stock direction risk, no earnings risk, and reduces even the volatility risk.
The strategy has won more than 50% of the time, has returned 221% annualized returns, but has also shown a high win-rate of 75%.
This is it — this is how people profit from the option market. Identifying strategies that don’t rely on a bull or bear market.
This is for the advanced option trader, just note that this has a few steps to it. First we start with the timing:
We want to look at a very short window, specifically opening a trade six-days before an earnings announcement and closing it the day before. Here it is plainly:
So, to be clear — this trade does not take on the risk of earnings, it closes before earnings.
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With the timing set, we now construct the trade in with these rules:
* Buy the at-the-money straddle with a 30-day expiration (or closest to it)
* Sell an at-the-money straddle with a 7-day expiration (or closest to it)
* Both of these straddles have expirations after earnings.
Here’s how this looks, plainly:
And here is the reasoning behind the trade, before we get to the results:
TRADE REASONING AND RESULTS
The idea is to own the straddle with a longer expiration and sell the straddle with the closer expiration to benefit from the time decay in the shorter-term options. It’s a fine cut to make this work, but this trade does not take earnings risk, does not take stock direction risk and takes very little volatility risk.
Now, here are the results of this trade in GoPro Inc over the last two-years:
While the set-up took a while to describe, the results are easy. We see a 29.1% return over the last , which was 8 earnings cycles. This option trade won 6 times and lost 2 times.
Even further, each period of this trade is just six-days, so that 29.1% return is actually just 8 weeks of trading, and if we annualize that, it makes for a 221% return.
Betting on a bull market to continue or relying on picking the right time to change sentiment can be very tricky. But the most advanced option trades side step those potential pitfalls by arranging an option trade that doesn’t take any stock direction risk, earnings risk and even limited volatility risk.
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