Don’t Hold Through ER

Don’t Hold Through ER

 

MARKET OVERVIEW
If you have been saying to yourself, “self, I’d really like an action-packed trading week…” you have been happy this week. This week featured significant market moving data including the FOMC interest rate decision (which always moves markets one way or the other), and a host of major earnings reports delivering dreams and nightmares to options traders via IV crush. First, the Fed.

On Wednesday, the Fed released its decision to raise the interest rate .75 basis points. This is the second such decision in as many months. The consensus expectation was that a .75 bp hike was priced in, meaning it would not move the markets that much. A lower-than-expected .5 bp would have been bullish for the markets while a full bp hike would drive short-term indices and stocks downward. Alas, the expected .75 was announced and the following economic projections and speech by Chairman Powell resulted in a strong pump for the rest of the trading day. Thursday continued very strong as well as Friday. Will it last? I broke my crystal ball so I’ll have to get back to you.

 

INSIDE THE BOX
This week featured a bevy of significant earnings reports throughout the market. Companies such as Philips, logitech, Alphabet, Coca Cola, Visa, Microsoft, Meta, Ford, Shopify, Apple, Amazon, Roku, Intel, Exxon, Chevron, and other giants reported this week with mixed results across the board. Like Snapchat last week, some of these companies reported well and their stock fell. Additionally, some prices reacted positively; however, call options opened lower It is known to happen, and it is unpredictable. It goes to show the dangers of gambling on directional moves with options during ER season, and that was one of the focal points inside our trading community this week.

The across-the-board advice regarding holding options through ER in hopes of making money from a directional move… “Don’t hold through ER.” Even though this sage advice is shouted from the BlackBox Mountaintops time and time again, some chose to gamble with options. And all too often, implied volatility drains the premium out of the “winning” options and traders fall victim to IV crush.

A great example is the SNAP flow play sent to members’ phones last week. On Monday of last week, this was sent out on our system:

SNAP flow play as sent to members’ phones:

SNAP flow play

 

This flow play was profitable within a day or two, and it was not advised to hold it through the upcoming ER that was Wednesday of last week. Moderators tweeted the advice to take the green and not hold through ER. There is simply no way of knowing what could happen. Alas, the flow play that was profitable before the earnings report—and the subsequent 25% decline in the stock price—was deflated in value after the earnings played out in the market. Of course, there is time on that play if someone did hold it through ER, but that is a prime example of why our teachers and moderators never advise holding options through ERs. They are decaying assets after all with complex greek exerting mathematical influence on price and if IV crush happens…that decay is swift and fatal.

 

TAKEAWAY
Though some no doubt decided to gamble on various ERs, a large number of our traders do heed the wise advice simply to not hold through ER.

Say it altogether now: Don’t hold through ER.

This was a wild week in the market, and I hope you found success if you are intraday trading.