by Bill Baker, J.D.
SINL Editor and Publisher
On 11/05/2013 TSLA closed at $176.81 +1.61 (.92%) and reported earnings after the 11052013 market close. Tesla's earnings report was not received well and the stock was down $18 - $20 or more after hours and before the market open.
SIDE NOTE -- hypothetical combination.
On 10312013 hypothetical investor buys:
100 TSLA Mar 22 '14 $295 Call @ $1.55
100 TSLA Jan 18 '14 $80 Put @ $0.53
On 10312013 hypothetical investor sells:
100 TSLA Mar 22 '14 $295 Call @ $2.30
100 TSLA Jan 18 '14 $80 Put @ $0.35
On the morning of 11052013 before TSLA reported earnings after the market closed, there was a small profit in the position opened on 10312013. Should an investor take the profit or wait for the earnings report?
On 11/06/2013 TSLA closed at $151.16 -25.65 (-14.51%)
If the above-mentioned option investor close out the option combination that they set up, they would have realized a profit of .57 or approximately $5,700 before commissions.
If they waited until after earnings, their combination would have looked like this:
100 TSLA Mar 22 '14 $295 Call -- bid .53 x ask .82
100 TSLA Jan 18 '14 $80 Put -- bid .45 x ask .57
Assuming sales at halfway between the post earnings bid and ask prices (TSLA $295 Mar 22 '14 Call at .675 and TSLA $80 Jan 19 '14 Put at .51; the above-mentioned investor would have realized a losss of .895 or $8,950 if they had waited until after TSLA reported earnings to close out their option positions.
As we, know, there is usually a premium associated with option prices when they are purchased or sold in the days before an earnings announcement. Especially when we are talking about highly anticipated earnigs that have a potentially dramatic impact on stock prices. Options on stocks such as GOOG, AMZN, TSLA, NFLX, AAPL, PCLN often have premiums baked into their prices in the days before earinngs are reported.
If the TSLA example I have used in this article, post earnings, TSLA would have had to close 45 to 50 points higher or 40 to 45 points lower than than its $151.16 11062013 post earnings close price in order to break even. Therefore, post earnings, TSLA had to reach a price of approximately 201 or 110 in order to break even on the 10312013 option combination that is presented at the start of this article. On the other hand, you could have purchased a TSLA options 5 5 or 6 days before earnings and taken your profit before the earnings report.