creapure2 wrote:CNBC had a short segment on an possible option play heading into FB earnings (they featured a covered call spread I believe). It got me thinking about what kind of option plays I could do. I was thinking about a straddle (buy 28ish strike put, buy 35ish strike call).
To be honest, I don't have too much options experience, especially heading into earnings. Will a lot of other people be buying options too, causing vols/premiums to spike? Is there even a good play that can be made here or do you think it would be better to leave it alone?
Appreciate your thoughts!
I suggest not to make any investment or trading decisions by listening to CNBC. Most of the time, person recommending talk their positions.
28 put/ 35 call trade is a strangle, not a straddle. Straddle will have same strike for both put and call.
Option trading is all about probabilities. There is 20% probability FB will be in the money (at 28 or 35) from weekly option price. Trading on earnings is especially hard.
Yesterday FB closed at 31.54. Most of the option traders place bet on either on weekly option (FEB1 13) or monthly option (Feb2 13).
From the option prices, FB is priced to move +/- $3 after earnings. If the FB price closes at same price just before earnings as yesterday, your strangle will fall within that price move. One thing for certain on any option, which prices single event is volatility gets crushed. Current FB weekly option vol. of 92% will be in high 40's to low 50's after earnings report on the opening print.
Current strangle price for 28/35 weekly option strangle is 80 cents. If FB moves $3 as predicted by option prices, then your strangle will worth around 20 or 21 cents (accounting for 45% vol crush and $3 move), on Thursday opening after the earnings. To make money on your strangle, you need outsize move from the predicted price. Way outside moves can happen like yesterday on Netflix, then you will be very profitable. But on consistent basis, option markets tend to be correct.
Taking into account 80 cents paid for the strangle, your strategy will have 5% probability to become profitable
Edit: since you own both puts and calls your probabilities are double. So you have around 10% prob of being profitable and around 35to 40% being in the money