Thoughts on Options Strategies During Q1 Earnings

If you’ve been reading the financial press of late, you’ll likely know it’s earnings season. Before the month is out most of Europe’s largest companies including ASML, LVMH and L’Oreal will have reported their financial performance during the first three months of the year

All listed companies are required to produce a quarterly earnings report which discloses information about their revenues, sales and profits in the most recent quarter.

These are closely watched events by investors, analysts and traders alike as companies reveal their financial health and give an indication about future performance for the rest of the year. They are an essential tool to understand a stock’s investment potential but also influence prices in the short-term – a company’s share price can increase or rise depending on whether the beats or misses its earnings estimates.

This article considers how two option trades might be used to capture moves in a company’s stock following an earnings statement. We’ll use a hypothetical company called EuroChips.

The company has seen strong earnings growth and multiples expansion in recent years and its share price has risen from €600 to €800 since the start of the year alone.

One question option traders might ask from this point is whether EuroChip’s performance can continue pushing its share price towards €1,000, or whether it is more worth buying protection against a decline back to €700/share. For the two hypothetical sample trades in this article, we look at options expiring on 17 May 2024, a few weeks after EuroChips is expected to announce its Q1 earnings in mid-April.

Bullish Call Spread: Capturing A Rise to €1,000

For traders expecting EuroChips shares to rise to €1,000 per share by mid-May, one of the simplest ways of capturing this move is by buying a call spread with an upper strike of 1,000. For this example, we consider a simple 100-point wide bullish call spread where we buy the 900 strike call and sell the 1,000 strike call for a net premium cost of 14 points, or €1,400 per call spread.  Buying this call spread risks the loss of the €1,400 premium if EuroChips remains below 900 by expiration, but in exchange the maximum payout is €10,000 if EuroChips trades above 1,000 at that time. 

In between these two strikes, there is still potential for a rate of return if EuroChips closes anywhere between the breakeven price of 914 and 1,000 on the 17 May expiry date.

Bearish Put Spread: Getting Paid For Retracement Back to 700

A more bearish or cautious trader may feel that EuroChip’s share price rise may have been a little too far, too fast, and so instead of buying exposure to further price rises, may be looking to get paid if EuroChips falls back to 700 or lower.  One solution for this is buying a bearish put spread, consisting of a long position in 750 strike puts, while selling the 700 strike puts, both also expiring on 17 May 2024 and quoted for a net premium of around 5 points, or €500 per 100 share put spread.

The maximum loss from buying this put spread is the 100% loss of the €500 premium paid, should EuroChips still be trading above the upper strike of 750 at expiry.  Conversely, if EuroChips falls to 700 or below by mid-May, then this put spread will be worth the maximum value of €5,000, or 10x the premium paid.

Combinations & Conclusions

One advantage[IB1]  of options instruments is that traders can choose to combine or consider opposites or variants of any of these theoretical samples presented.  For example, a trader who expects a big move in either direction, but not sure which direction, may consider buying both of the above spreads for a total cost of €1,900.  This risks losing all €1,900 if EuroChips finishes between 900 and 750 at expiry, but could be worth €10,000 if EuroChips exceeds 1,000 or €5,000 if EuroChips falls below 700 by that time.  On the other hand, a trader thinking EuroChips is more likely to stay within that 750-900 range may prefer to sell these two spreads and receive the €1,900 up-front premium, in exchange for the risk of having to pay out as much as €10,000 if EuroChips rises to 1,000 or higher.

Learn more

Visit Cboe’s Options Institute to explore the basics of options trading: https://www.cboe.com/optionsinstitute/europe

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Cboe Europe offers trading in shares from across Europe and, through Cboe Europe Derivatives (CEDX), options are also available on shares in close to 300 leading European companies. [IB2] 

Learn more about CEDX here: https://www.cboe.com/europe/derivatives/single_stock_options/

Disclaimers:

• The above is the product of external market analysis commissioned on behalf of Cboe Europe B.V. The views expressed herein are those of the author [IB3] and do not necessarily reflect the views of Cboe Europe B.V., Cboe Global Markets, Inc. or any of its affiliates (‘Cboe’). For more information on how this research was conducted and/or the author please contact EUDerivatives@cboe.com[IB4] 
• The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice.
• Cboe does not select the financial product for you to transact. Your financial adviser, broker, or other financial services professional may select the financial product for you to transact and you should speak with your financial advisor, broker or professional, as applicable, regarding any such selection.[IB5] 
• Hypothetical scenarios are provided for illustrative purposes only. The actual performance of financial products can differ significantly from the performance of a hypothetical scenario due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences, and other considerations that may not be applicable to the hypothetical scenario.
• Trading in options and options strategies can be complex and recommended for sophisticated investors with the appropriate level of knowledge and expertise in these transactions
• The content of this article should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe financial product or service described.
• Past performance of a financial product or index is not indicative of future results. These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position.
• This information is not being provided as part of an offer or sale of any futures or options products to any persons located within the United States or to a jurisdiction where the provision of this information is prohibited