Option Strategies for Earnings Announcements: A Comprehensive, Empirical Analysis

Overview

“This is a remarkable book that I would recommend to any active investor who wants to explore event-driven strategies and go beyond simple buy-and-hold. Ping Zhou and John Shon provide some very detailed analysis on trading earnings news with options. They expertly cover directional and volatility trades and trades around earnings announcements, discuss the security selection process, and document the backtest results of their strategies.”
--Minh Trinh, Managing Partner, Referee Advisors LLC

“The authors have ...

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Option Strategies for Earnings Announcements: A Comprehensive, Empirical Analysis

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Overview

“This is a remarkable book that I would recommend to any active investor who wants to explore event-driven strategies and go beyond simple buy-and-hold. Ping Zhou and John Shon provide some very detailed analysis on trading earnings news with options. They expertly cover directional and volatility trades and trades around earnings announcements, discuss the security selection process, and document the backtest results of their strategies.”
--Minh Trinh, Managing Partner, Referee Advisors LLC

“The authors have provided a remarkable analysis of how the timing of earnings announcements affects option value. This clarifies the true meaning of volatility, and the exhaustive research that backs up the authors’ conclusions leaves no doubt about the effects of earnings timing. Whether you prefer long or short positions, in, at, or out of the money, or volatility plays, you cannot ignore the importance of this work. I recommend this book to all serious options traders.”
--Michael C. Thomsett, author, Options Trading for the Conservative Investor, second edition, and The Options Trading Body of Knowledge

  • Detailed strategies supported by comprehensive analysis of the actual data: not cherry-picked anecdotes or guesswork
  • For option investors seeking market-neutral strategies and stock investors who want to hedge earnings risks

Option trading on earnings reports offers immense profit opportunities, if you know how. For the first time ever, there’s a comprehensive, evidence-based guide to profiting from these trades. This guide reflects analysis of the full universe of all equity options contracts traded over 14 years: objective, empirical results based on millions of observations. The authors distill this unique data set into knowledge you can immediately apply to identify trades with high profit potential and low market risk.

Zhou and Shon demonstrate the impact of changes to holding periods, strike prices, expiration months, and other factors. Next, they walk through diverse approaches based on options trades made before, during, and after earnings announcements. Finally, they explore ways to improve profitability by identifying characteristics of securities most likely to support profitable earnings-related trades--even drilling down to specific industries and the impact of analysts’ forecasts.

By trading on corporate earnings, investors can potentially profit in both up and down markets. Moreover, such strategies avoid taking market risk during non-event periods. Now, two leading traders and portfolio managers present detailed, specific, actionable techniques any moderately experienced investor can use to capture these sizable profits.

Ping Zhou and John Shon have performed an unprecedented empirical analysis of thousands of companies, reviewing tens of millions of data points associated with option prices, earnings announcement returns, and fundamentals. They have identified consistent opportunities associated with focusing on the magnitude of the market’s reaction to earnings, not necessarily its direction. Drawing on this extraordinary body of work, they offer concrete guidance for improving the likelihood of making correct forecasts and managing the risks of incorrect forecasts. Their analysis is based on solid, empirical evidence rather than selective anecdotes, which lends higher credibility to their recommendations. Their quantitative work also helps investors better quantify and manage risks.

Option Strategies for Earnings Announcements introduces valuable new ways to exploit option trading opportunities around earnings news, illuminates crucial issues most investors have never considered, and explores aspects of earnings-related option trading that have never been empirically examined before. Whether you’re an options investor seeking profitable market-neutral strategies or an equity investor who wants to hedge earnings-related risk, it provides the end-of-quarter advantage you’ve been searching for.

Let the data surprise you--and follow where it leads
Profit from historical evidence you (and the rest of the market) didn’t expect

Master volatility-based earnings trades
Trade on the magnitude of earnings-based moves, not their direction

Ride post-earnings-announcement drift to greater profits
Outperform by combining the right securities with the right strategies

Use advanced analysis to significantly improve your odds
Exploit implied volatility, market cap, valuation, industry effects, and historical earnings announcement returns to improve the probabilities of profitable trades

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Product Details

  • ISBN-13: 9780132947398
  • Publisher: FT Press
  • Publication date: 11/8/2012
  • Edition number: 1
  • Pages: 216
  • Sales rank: 545,363
  • Product dimensions: 6.10 (w) x 9.10 (h) x 1.10 (d)

Meet the Author

Ping Zhou, Portfolio Manager and Senior Vice President at Neuberger Berman, specializes in portfolio theory, market anomalies, investor behavior, corporate finance, and risk management. Formerly Accounting Professor at City University of New York-Baruch College, he publishes extensively in leading academic and practitioner journals on equity investing. He holds a Ph.D. in Accounting from Georgia State University’s Robinson College of Business.

John Shon, Prof. of Accounting at Fordham’s Gabelli School of Business and Graduate School of Business Administration, has earned several grants and awards for his equity markets research and has published extensively in academic journals. He holds a Ph.D. in Accounting and an MBA from the University of Chicago’s Booth School of Business.

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Table of Contents

Preface xv
Part I: Introduction 1
Chapter 1: Earnings Announcements: Opportunities and Risks 3
Chapter 2: Option Strategies for Earnings Announcements: An Overview 11
Chapter 3: Liquidity Risk: Bid-Ask Spreads 23
Part II: Options Strategies for Earnings Announcements: Let the Data Speak 39
Chapter 4: Bullish Directional Trades 41
Chapter 5: Bearish Directional Trades 59
Chapter 6: Long Volatility Trades 79
Chapter 7: Short Volatility Trades 95
Chapter 8: Buy Volatility before Earnings Announcements 109
Chapter 9: Ride the Post-Earnings-Announcement Drift 121
Part III: Advanced Analysis: Improving the Odds of Winning 135
Chapter 10: Implied Volatility 137
Chapter 11: Historical Earnings Announcement Returns 151
Chapter 12: Market Capitalization 161
Chapter 13: Valuation 169
Chapter 14: Industry Effects 183
Chapter 15: Enhanced Strategies 195
Index 207
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