Playing Company Announcements
Len Yates

Catching a big price move is an option buyer's dream from the time that we first learn about options and how they can be used to speculate.  The combination of limited risk and unlimited potential was – and still is for many – the main attraction of using options.

I have devoted a significant amount of time over the years to researching company announcements – how to anticipate them and how to profit from the sudden stock price moves that sometimes follow them.  I have been interested in earnings announcements, FDA announcements, any kind of announcement that could move the stock.  The bigger the potential move, the better.

The strategy of choice in these kinds of plays is simply to buy options – either just calls, just puts, or both.  Nothing more complicated than that.  If I want to cash in on a big move, there is no point in using a strategy that limits my returns.  However, since there is a possibility of losing the whole investment, only a small amount should be invested in any one trade.  I have mainly used OTM options because of the greater leverage.  As a result, when the trade does not work out the whole investment is usually lost.

Naturally, options are more expensive when everyone knows that an important announcement is coming.  Even so, it can be worth it to buy a few.  Do this enough times – over a broad selection of different stocks in different kinds of situations – and you should find that the few good trades more than make up for the many losing trades.

The best opportunities are often among the pharmaceuticals and biotechs.  Company or FDA announcements can make these stocks jump, in most cases, farther than the option volatilities would have indicated they should prior to the announcement.  It would not be unusual to see a pharmaceutical stock double on the release of good news.  I have seen instances after the FDA approved a new drug when the out-of-the-money (OTM) calls went from 0.30 to 30.00 that day – 100x your money!  Positive outcomes in other trades I have followed yielded anywhere from 44x to 1.0x (breakeven).

Page: 1 2 3 4