Top 10 Option Trading Tips

Option Trading Tip #6

My top 10 call and put option trading tips that I have learned, and that you MUST know before you start trading calls and puts.

---

---

Trading Options Tip #6:

When trading call options and put options, beware of earnings release dates and their impact on option prices.

---

Both put option and call option prices are very expensive and generally increase during the week of an earnings release. This is because of the anticipation of the potential of a very strong or very weak earnings release which would cause the price of the underlying stock to move significantly. So when you are trading options, always make sure you know when the company is expected to release earnings and don't overpay for your options.

Follow on to the above comment, option prices will decrease immediately after an earnings release. Once the earnings release is over and the cat is out of the bag, option prices will return to normal as the expected volatility subsides.

And yes it is possible and, in fact, very common for a stock price to move up and the call option price to go down! This happens a lot when earnings are only slightly more positive than the market was expecting. For example, on volatile stocks like Apple and Google during option release weeks option prices can get insanely expensive. On a recent Apple Tuesday night quarterly earnings release date, Apple was trading around $450 a share and the $460 call options that expired that Friday were at $20. In order for the buyer of this call to make money, Apple stock had to be at $480 within 3 trading days! That meant the market had priced in an expectation of a $30 price movement in Apple stock due to the earnings release.

The funny thing about this Apple earnings release was that the $440 puts were also price at $20 meaning that Apple had to fall to $20 for the buyer of the put to make money. So 1/2 the people were betting on a $30 point increase and half were betting on a $30 point decrease in the stock price. So what happened? Apple release earnings right in line with expectations and the next day the stock price was still at $450 and price of both the calls and the puts dropped to $3 each. Ouch! Those buyers of the both the calls and the puts lost a lot of money Which also means, by the way, that the seller or writers of those options made lots of money!