Capturing Profits on After-Hours News
By Bill Johnson
Options trading is quickly becoming a favorite tool for investors and traders alike – especially in today’s uncertain markets. The reason is simple: Options allow investors to profit in ways that cannot be done with stock alone. But there are tactics most options traders don’t know that can be used to profit when news is announced after the closing bel
Anyone who’s invested for a while knows that big news is often withheld until after the closing bell in order to not disrupt the markets while open. It’s why earnings are announced either prior to the opening bell or after the closing bell.
Sometimes, however, the stock can trade to exceptional high values after hours, and if you’re holding call options you’d like to sell, there’s nothing you can really do about it. No matter what the stock price may show in after-hours markets, you must wait for the opening bell before you can sell the call option. The risk is that prices may move against you during the night, and when the opening bell rings, your anticipated profits have evaporated.
A recent example occurred on April 26, when Amazon released stellar earnings by reporting $3.27 per share versus $1.26 per share analysts expected. The next morning, prior to the opening bell, the stock was trading up $140 at $1,658 – over 9%. Let’s say you bought the $1,550 call before earnings. With the stock trading at $1,650, you’re expecting to close the option for the 100-point difference, or $10,000 per contract. The problem is that sometimes the euphoria fades prior to the bell, and the stock may open at much lower levels. But again, there’s nothing you can do until the opening bell – or is there?
There’s a trick that experienced options traders will do. Rather than taking your chances and waiting for the market to open, you simply short 100 shares of stock in the after-hours market. Once the trade is filled, exercise your call option. For instance, if you short shares at $1,650, you collect $1,650 per share in cash, but you owe 100 shares of stock to the broker. By exercising the call, however, you’ll buy 100 shares, which clears the short position. The cash for the exercise is automatically created from the short sale. You collected $1,650 cash but use $1,550 of that cash to exercise the call, which leaves you with the $100 difference. The trade, therefore, requires no out-of-pocket expense. It’s self-financing.
Another problem can occur to for traders by waiting for the opening bell. Options go through an opening rotation, so most option strikes won’t open for trading for 10 minutes or so after the opening bell. During this time, however, the stock price is off to the races – and may be racing south. That’s exactly what happened to Amazon on this day, and it closed at $1,572 – a big difference from the $1,634 opening price. Even if you placed a market order to sell your contracts on the opening bell, your execution price would be significantly lower that what you were anticipating. Experienced options traders know the tactics, rolls, hedges, and morphs to make the most of any situation. It’s the art and science of options trading that makes the difference between trades that make you crazy – and ones that make you money.
Good Investing!
Bill Johnson, Steve Bigalow
and The Candlestick Forum Team
P.S. Bill Johnson’s Alpha Trader Options Course takes you from the very beginning, step-by-step, through an exciting journey into the world of options. At the end, you’ll have the necessary knowledge and confidence to start investing and hedging with options. In addition, you’ll have a rock-solid foundation from which to continue your options education.
Trading in the Stock Market, Trading Options, Trading Futures, and Options on Futures, involves substantial risk of loss and is not suitable for all investors. Past Performance is not indicative of future results. CandlestickForum.com, Candlestick-Trading-Forum.com, StephenBigalow.com, and Candlestick Forum LLC do not recommend or endorse any specific trading system or method. We recommend that you research all trading systems, methods and market strategies thoroughly. Full Disclaimer here
