Using Weekly Options During Earnings Season: A Real-Life Example with RingCentral, Inc. (NYSE: RNG) – December 11, 2023
Populating our covered call writing and put-selling monthly portfolios during earnings season can be challenging as we seek to avoid companies about to report earnings. This is the most important rule in the BCI methodology. All other parameters are simply guidelines. Most companies report quarterly earnings in January, April, July, and October. These impact the monthly contract expirations for the February, May, August, and November contracts.
There are several approaches we can implement to mitigate these quarterly event hurdles:
- Use stocks that don’t report in a particular option monthly expiration cycle (there will always be several, but limited, choices).
- Use exchange-traded funds (ETFs) which do not report earnings as an entire security.
- Use stocks that have weekly options associated with them and avoid the week of the earnings report. This last approach is the topic of this article.
BCI Premium Stock Report prior to the August 2023 monthly expiration contracts focusing in on RNG (Reports earnings on 8/1/2023)
- RNG has weekly options (red circle)
- Report shows a high beta of 2.32, more than double the historical implied volatility of the S&P 500. It also shows a forward-looking implied volatility of 42.4, almost quadruple that of the S&P 500 (11.00) at the time this screenshot was created. We are expecting significant premium returns if we can also tolerate the downside risk.
Weekly expirations for the August 2023 monthly contracts
- 7/28/2023
- 8/4/2023 (no option sold this week)
- 8/11/2023
- 8/18/2023
RNG option-chain for the weekly expiration on 7/28/2023
- With RNG trading at $42.92, we will look at the $45.00 out-of-the-money call strike.
- The option-chain shows a bid price of $0.55, with a favorable bid-ask spread of $0.05 and adequate open interest of 160 contracts.
RNG weekly calculations using the BCI Trade Management Calculator (TMC)
- The high implied volatility of RNG has generated an initial time-value return of 1.28%, 58.47% annualized (brown cells).
- This annualized return is reduced by 25% since we are using only 3 of the 4 weeks in the August contracts, thereby generating an annualized return of 43.85%.
- These are initial returns. Final returns can be higher or lower, but this is our starting point.
- The breakeven price point is $42.37 (yellow cell).
- There is an upside potential of an additional 4.85% if RNG moves from its current market value ($42.92) up to the $45.00 strike (purple cell).
Discussion
The BCI rule of avoiding earnings reports makes earnings season challenging in terms of populating our covered call writing and put-selling portfolios 4 times per calendar year. We can mitigate this issue by using securities that do not report in that specific monthly contract cycle, using ETFs and focusing in on stocks that have weekly options.
Author: Alan Ellman