Earnings Trades With Options
An Alternative Approach
Another trade inspired by the Portfolio Armor Substack — targeting a promising AI stock with earnings in mid-August. Most traders target the expiration immediately following the earnings date when setting up an options trade. This post describes how to set up a trade with much cheaper pre-earnings options and even bigger potential upside than buying the expensive options after the earnings date.
The stock in question is SuperMicro, Inc., a stock we have mentioned many times in this Substack. We like SuperMicro a lot not only for their stock, but for their outstanding hardware. In fact, SpreadHunter uses SuperMicro exclusively for the high performance motherboards that drive our real-time analytic systems.
Here is the SpreadHunter Options Matrix for SMCI on the July 18 expiration:
With the stock trading at 49.06, the in-the-money 46-56 Call Vertical is quoted at 3.35. The Max Loss is 335- per spread and the max gain is 615-. The breakeven of this spread is 49.85 which is lower than the breakeven on the at-the-money call option which is 51.62. Needless to say, looking at the options chain on the August Expiration will show spreads a LOT more expensive than what we see in July — not only is there more time decay, but there is much higher volatility from earnings.
Here is the August 15 Matrix:
We see that (almost) the same spread is trading for more than 100- more than the July Call Vertical.
The idea behind buying the cheaper spreads is this: if the stock goes up, but not all the way to the top strike, allow the long option to auto-exercise and hold the stock going into earnings. If there is a market plunge, the cheaper July spread loses a lot less than the expensive August spread. And if the stock continues to rally after earnings, the long stock position will capture all of the move without Theta (time decay) drag.
Disclaimer : All Content on the Nuclear Option Substack is for Education and Information Purposes only. It does not a soliciatation or recommendation to buy or sell any security. Before trading, consult with your Professional Financial Advisor and read the booklet Characteristics and Risks of Standardized Options Contracts, available from the Options Clearing Corporation.