Disclaimer: I am not an investment advisor. When I describe my own trading activities, it is not intended as advice or solicitation of any kind.

20 July 2013


Intel (INTC), IBM, and Xilinx (XLNX) all reported earnings last night. Being the pessimistic contrarian that I am, I intended to buy puts on all three of these companies. In fact I was working orders to buy puts on Monday, but didn't get filled. I like to buy the puts a couple of days early, because experience with Research in Motion (previously RIMM, now BBRY) has shown that option cost goes through the roof shortly before an earnings announcement. Apparently the market makers are aware that earnings announcements move stocks, and so are building more expected volatility into the vega. So I exchange a couple of days of market risk for lower implied volatility cost, as long as I feel I'm getting a good price for the options.

Anyway, I didn't get filled on Monday, and intended to place my orders again on Tuesday -- I don't believe in GTC for options entry orders, that's the way to get a really nasty surprise after forgetting about the orders. But life intervened, and it completely slipped my mind until last night long after the market close. I went ahead and checked the price action on those three stocks this morning, and this is what I found:

  • INTC opened at 23.47, down from its close of 24.15. Their earnings missed expectations by $0.005/share. My put would have increased in price by about 50% overnight.
  • IBM opened at 198.27, up from its close of 194.55. Their earnings were $3.97/share, crushing the expected $3.77/share. My put would have decreased in price by 67% overnight.
  • XLNX opened at 45 and rallied to 46 in the first 15 minutes of the trading day, up from its close of 43.53. Their earnings were 56c/share, handily beating estimates of 47c/share. By the time I got out of it, my put would have decreased in price by 75%.
That's a pretty big bullet my absent-mindedness helped me dodge! Just how big? Let's say I put $1000 into each of those positions:
  • INTC: $1000 * 50% profit = $500 profit
  • IBM: $1000 * 67% loss = $670 loss
  • XLNX: $1000 * 75% loss = $750 loss
  • Total Loss: $920 on a $3000 investment, or -31% overnight. Ouch.
Sometimes forgetfulness saves money.

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