Earnings Season! Hedging your profitable positions w/ options


Earnings Season! Hedging your profitable positions w/ options


Earnings season is now upon us.  A question I get asked a lot about is how do I hedge my profitable long stock positions but still play the upside?

My answer to this question will rely on the position holder's answer to my set of questions.   These help customize the strategy where No, I am not a shrink but I did take 9 credits worth of college classes related to psychology and human behavior.

There will be

So here are my questions:

1) If the stock is pummeled post earnings, is there a a level that you will not mind buying the stock regardless of the technicals?

2) At what level will you be comfortable selling your stock should the earnings come out positive and the stock continues to move up?

I will use a a current example which one can easily replicate for the weeks ahead.  Assuming you bought 100 shares of $AAPL @ $330 and while you think it can go close above $360, you are worried that if Wall St. isn't impressed with the numbers, they could take it down to $315(which might be a level you don't mind going long again).  So here you are with a profit of $15 per share (as of 10:30AM, 4/20) and unsure of whether you want to hold into earnings in case it shoots up but worried that it might get sold hard if the earnings aren't good enough.  Given such scenario, here are a couple of  interesting, low cost strategies :

1)  Insurance that pays BUT read the fine print

Sell the May $360 call for $4.85; Buy the May $335 put for $7.20; Sell the May $315  put for $2.50.  You can put this combination in for a $0.15 credit.  Basically, you are buying a $20 ($335 to $315) insurance to the downside below $335 and financing that by giving someone the right to take the stock away from you at $360.

Simply put: If stock pops and closes anywhere above $360, you will be selling it at $360 for max gain of $30/share.  If the stock gets hit and goes below $335, you are protected but only up to $315.  Anywhere below $315, you aren't protected.

2) "Will not lose sleep 'coz I know my risk" strategy

Sell stock for a $15/share profit.  Use profits to buy a May $345/$360 call spread (Buy $340 call, sell $$350 call) for $6.20.

Simply put: If stock tanks, you don't lose anything but the premium you paid for the call spread.  If it expires worthless, you are still profitable in your overall position ($15 stock profit minus $6.20 premium paid=profit of $8.80).  If stock pops, your call spread can have a maximum value of $15, regardless of how much higher above $360 $AAPL is  on May Options Expiration.  Your maximum profit is $23.80 per share ($8.80 net profit on the call spread + $15 on the stock).  You're risking $6.20 (premium paid) to make an additional $8.80 on the upside while not risking anything to the downside.

If you have 200 shares, you can take 1/2 off to lock profits and then look to possibly put on one of the aforementioned strategies.

As with any position, you do not have to wait until May Options Expiration to liquidate it.  However, these plays profit and loss potential are based on the thesis that you will hold onto positions until May Options Expiration.

There are other stratagies you can put on but I wanted to keep it brief and simple.  If you have any specific questions about the blog or other strategies, please don't hesitate to contact me:

Twitter: @jdub929

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*options contract prices are as of 10:30AM ET on 04/20.

**one can look to play this using the April weekly options as well but I prefer the May contracts as it gives me time to analyze the situation and tweak the strategy if needed without worrying about the contracts expiring on Thursday, 4/21

Posted in General Trading, Options, Stocks