Earnings Season is here. Why NOT to play Naked Options on earnings? 🚩
And How to play earnings with Sympathy Plays?
Thread 👇
And How to play earnings with Sympathy Plays?
Thread 👇
What are Sympathy Plays?
A sympathy play is when the stock of one company gets affected by earnings or news delivered by another company in the same industry, business segment or space.
A sympathy play is when the stock of one company gets affected by earnings or news delivered by another company in the same industry, business segment or space.
Examples of Sympathy Plays?
For example, if a social media company such as $SNAP reports good subscriber numbers and strong results, there is a very good chance that $TWTR, $PINS, and $META (some extent) will strongly react to $SNAP results. Why? Because all these social
For example, if a social media company such as $SNAP reports good subscriber numbers and strong results, there is a very good chance that $TWTR, $PINS, and $META (some extent) will strongly react to $SNAP results. Why? Because all these social
media companies operate in the same business segment (Advertisements). So, If one company reports good results, it is an indication that
1. The industry overall is doing well
2. Fair probability that the competitor also did well (assuming that internal factors didn't change)
1. The industry overall is doing well
2. Fair probability that the competitor also did well (assuming that internal factors didn't change)
Therefore, the sympathy stocks move when peers report earnings.
Similarly, tons of names in each sector such as Semiconductors, Entertainment, Consumer Staples, Technology etc. have some good sympathy play moves.
Similarly, tons of names in each sector such as Semiconductors, Entertainment, Consumer Staples, Technology etc. have some good sympathy play moves.
Why to play Sympathy Plays instead of directly playing stock's earnings?
Because of the so called Implied Volatility of Options and hence, the Risk to Reward Ratio on the play.
If you are taking a naked Option position (Calls or Puts) on a stock,
Because of the so called Implied Volatility of Options and hence, the Risk to Reward Ratio on the play.
If you are taking a naked Option position (Calls or Puts) on a stock,
the premium amount that you are paying, is already jacked up ahead of earnings. Why?
Because Market Makers, based on the historical move on the stock, have already calculated the implied move (be it on the upside or the downside) and have priced that in the premium hence,
Because Market Makers, based on the historical move on the stock, have already calculated the implied move (be it on the upside or the downside) and have priced that in the premium hence,
inflating the premium and making it expensive.
So for you to make money, the stock would have to EXCEED that implied move (calculated by MMs.) & do exceptionally well.
If that doesn't happen, after the earnings day, the Premiums will collapse at the Open and you will be
So for you to make money, the stock would have to EXCEED that implied move (calculated by MMs.) & do exceptionally well.
If that doesn't happen, after the earnings day, the Premiums will collapse at the Open and you will be
in loss (even if the stock moved in your favor by certain points).
Therefore, be careful when playing earnings with Naked Options.
Happy Earnings Season everyone!
Therefore, be careful when playing earnings with Naked Options.
Happy Earnings Season everyone!
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