Update 6/8/2022: I exited my short bear call vertical spread on OLLI, nine days before expiration, for a $3.53 debit per contract/share, a loss before fees of $206 per contract. Shares were trading at $52.78, up $7.66 from the entry level.
The Implied Volatility Rank at exit was 33.3%, down 31.5 points from the entry level.
This was one of the stranger journeys for an earnings play. First, the listed date of the earnings announcement, in late May, was changed shortly before the expected event to June 8 — today — prior to the opening bell. Second, I had constructed the position as bearish, based on a Zacks Research negative earnings surprise predictor and a non-bullish Zacks rank.
At the time of the earnings announcement, those bearish metrics still held, and the company came through like a champ, missing its earnings estimate by a large percentage. Revenues also lagged expectations.
And it’s not like OLLI is a high performer that tends to fly in the face of negative expectations. It has a history of negative earnings reports.
And yet, after this negative report, the price rose, like a July 4 fireworks rocket. As a result, I exited 14 days after entry, for 100% of maximum potential loss. Honestly, I’m glad to have gotten out so easily, since the alternative, had the debit remained higher, would have to been to wait for the exit and exercise, and to have to deal with short shares placed in my account.
Zacks is up front about its earnings surprise predictor. It’s predicts accurately 70% of the time for a positive earnings surprise, and is quite erratic for negative surprises. Point taken. I’ll be trading positive surprises from here on out.
Shares rose by 17.0% over 14 days for a +443% annual rate. The options position produced a -58.4% loss for a -1,521% annual rate.
Update 5/26/2022. The listed earnings announcement date for OLLI changed after I entered the position. The new date is June 8 before the opening bell.
I have entered a short bear call vertical spread on OLLI, using options that trade for the last time 23 days hence, on June 17. The premium is a $1.47 credit per contract share and the stock at the time of entry was priced at $45.12.
The Implied Volatility Ratio stood at 64.8%.
|OLLI – bear call spread||Strike||Odds||Delta|
The premium is 58.8% of the width of the position’s short/long spread. The profit zone covers an 8.5% move to the upside and an unlimited move to the downside.
The risk/reward ratio is 2.4:1, with maximum risk of $353 and maximum reward of $147 per contract.
How I chose the trade. The trade was placed to coincide with OLLI’s earnings announcement on the day of entry. The time of day has not yet been announced. The short strikes were set to coincide with the expected move of $6.80 either way, based on options pricing, which gives a price range of $35.24 to $48.84. I structured the position as a bear play because the Zacks Investment Research earnings surprise predictor was negative, at -3.04%, with a strong sell rank of 5.
By Tim Bovee, Portland, Oregon, May 25, 2022
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
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