How to Manage Cash-Secured Put Trades Around an Earnings Report: A Real-Life Example with Etsy, Inc. (Nasdaq: ETSY) – February 06, 2023
When selling covered calls or cash-secured put options, we must avoid the risk of earnings reports. This is an important rule of the BCI methodology. This article will detail how a series of put trades were managed during the August 2022 contracts from 7/18/2022 through 7/29/2022, demonstrating pre- and post-earnings report (ER) trades. Note that both weekly and the monthly contract expirations were utilized.
What are cash-secured puts?
Put options are sold obligating the seller to purchase shares at the strike price by the expiration date. In return for undertaking this contractual obligation, the put seller is paid a premium. The broker will require the seller to place an adequate amount of cash into the brokerage cash account to secure that put. The amount of cash required is determined by this formula:
[(put strike – put premium) x 100] x # contracts
In the BCI methodology, we prefer out-of-the-money put strikes (lower than current market value).
Real-life put trades with ETSY for the August 2022 contracts
- 7/18/22: ETSY trading at $85.53 with ER due out 7/27/22. Will write a weekly put option and skip the following week of the ER
- 7/18/22: The 10-Delta, deep OTM 7/22/22 put shows a strike of $76.00 (approximate 90% probability of no exercise based on Delta)
- 7/18/22: STO 1 x 7/22/22 $76.00 put at $0.37
- 7/20/22: ETSY trading at $92.66
- 7/20/22: BTC 1 x 7/22/22 $76.00 put at $0.05
- 7/20/22: STO 1 x 7/22/22 $84.00 put at $0.27 (roll-up #1)
- 7/21/22: ETSY trading at $96.87
- 7/21/22: BTC 1 x 7/22/22 $84.00 put at $0.03
- 7/21/22: STO 1 7/22/22 $88.00 put at $0.15 (roll-up #2)
- 7/22/22: The $88.00 put expires out-of-the-money and worthless
- 7/27/22: ETSY closes at $95.50 and reports earnings after closing
- 7/27/22: After hours, a favorable ER
- 7/28/22: ETSY price accelerates to $104.92
- 7/29/22: ETSY price settles to $102.84
- 7/29/22: STO 1 x 8/19/22 $92.00 put at $2.15
Game plan
The August 2022 contracts were of a 5-week duration with the ER coming in week #2. The plan was to sell a weekly option for week #1 and avoid the option sale for week # 2 until the ER passes. When the post-report volatility subsides (if any), the put trade is entered for the monthly expiration date, 8/19/2022, in this case.
ETSY price chart around the 7/27/2022 ER
Takeaways as of 7/29/2022
The option trades in week #1 included 3 premium credits, including the 2 rolling-up trades. The sale of the monthly (post-earnings) expiration put resulted in an unrealized additional return of 2.4%.
Discussion
When using the conservative option selling strategies of selling cash-secured puts and covered call writing, we must avoid the risk of earnings reports. When weekly options are available, this task is quite manageable by simply avoiding the week of the report.
Author: Alan Ellman