Trading after Gap Opening
By Simon Lee, March 10, 2007
Although buying straddles before the earning brings profit so far, when you break down to each trade, the risk of 50%+ capital loss is still very high. It is almost impossible to pick all the homerun plays without a few bad moves. The theory at Optionslam.com, is to let the huge profit to overrun the losses in the overall play with proper money management.
Still, for various reasons, it is quite possible to miss some of those slam picks from time to time. Assume the stock price has already moved significantly in after-hour market, is that possible to re-enter the straddle trade at the market open? The answer is yes. It simply proves the theory: Trend is our best friend. Statistics generated from Optionslam.com can help to illustrate this trade model.
First of all, it is important to decide when a trend is clear established. Table 1 is the research based on stock Earnings performance between Jan 22, 2007 to Feb 16, 2007. To qualify, a stock is required to move further during the trading session along its after hour movement trend and its closing price must be further away from the opening gap.
|
Table 1: number of stocks following the after hour movement trend
|
| After Hour Price Movement |
Number of stocks follow the after hour movement |
Percentage |
| Between 8% to 10% |
19 out of 36
|
52.77%
|
| Between 10% to 12% |
9 out of 17
|
52.94%
|
| Between 12% to 14% |
5 out of 11
|
45.45%
|
| Between 14% to 20% |
10 out of 14
|
71.43%
|
| More than 20% |
2 out of 4
|
50%
|
Note:
A total of 1176 stocks are used in this study. It covers all NASDAQ/NYSE/AMEX stocks which offer options trading and traded above $10 before the earnings news.
After hour price movement: The price difference between opening price after earnings news and the closing price before the earning.
Number of stocks follow the after hour movement trend: The stock must move further during the trading session along with its after hour movement trend.
Result of table 1 shows there are 14 stocks had a opening gap between 14% and 20% after earnings news. 10 of them had continued the same trend once market opened, representing a successful rate at 72%. Table 2 list all those 14 stocks and their movement details.
|
Table 2: 14 stocks moved more than 14% and less than 20% in after hours market
|
| Symbol |
Earning Date |
Price Level |
After Hour |
Movement After One Trading Session |
Days Left |
Movement until Options Month End |
| Max Movement |
Final Movement |
Max Movement |
Final Movement |
|
ALGN
|
Jan 30, 2007 |
$13.77 |
+14.45%
|
+23.52%
|
+21.2%
|
17 |
+28.03%
|
+27.52%
|
|
AZPN
|
Feb 06, 2007 |
$10.29 |
+14.96%
|
+27.21%
|
+25.94%
|
10 |
+27.98%
|
+24.97%
|
|
BECN
|
Feb 08, 2007 |
$20.95 |
-15.03%
|
-15.27%
|
-11.02%
|
8 |
-17.89%
|
-16.56%
|
|
CENT
|
Feb 07, 2007 |
$14.75 |
-16.33%
|
-17.28%
|
-7.38%
|
9 |
-17.28%
|
-9.35%
|
|
CLZR
|
Jan 23, 2007 |
$11.9 |
-19.24%
|
-21.17%
|
+0.33%
|
24 |
-21.17%
|
-6.47%
|
|
ENER
|
Feb 08, 2007 |
$35.5 |
-15.69%
|
-16.87%
|
-16.47%
|
8 |
-23.35%
|
-15.88%
|
|
FEIC
|
Feb 06, 2007 |
$25.31 |
+14.18%
|
+28.52%
|
+28.09%
|
10 |
+35.28%
|
+35.16%
|
|
FSLR
|
Feb 13, 2007 |
$34.28 |
+17.79%
|
+30.83%
|
+27.53%
|
3 |
+36.69%
|
+32.03%
|
|
ISRG
|
Feb 01, 2007 |
$99.32 |
+15.78%
|
+18.77%
|
+17.56%
|
15 |
+18.77%
|
+15.19%
|
|
LCAV
|
Feb 12, 2007 |
$38.54 |
+17.39%
|
+20.52%
|
+19.17%
|
4 |
+22.8%
|
+20.21%
|
|
NTRI
|
Feb 14, 2007 |
$43.88 |
+15.67%
|
+15.9%
|
+13.46%
|
2 |
+15.9%
|
+11.66%
|
|
PLXS
|
Jan 24, 2007 |
$21.22 |
-16.21%
|
-16.21%
|
-14.32%
|
23 |
-21.72%
|
-19.88%
|
|
SIMG
|
Feb 08, 2007 |
$12.17 |
-19.55%
|
-24.48%
|
-24.07%
|
8 |
-25.63%
|
-22.76%
|
|
STMP
|
Feb 15, 2007 |
$14.3 |
+18.04%
|
+23.07%
|
+18.74%
|
1 |
+23.07%
|
+18.74%
|
|
TNL
|
Jan 25, 2007 |
$25.82 |
-14.02%
|
-16.73%
|
-16.03%
|
22 |
-17.97%
|
-14.02%
|
|
TTEC
|
Feb 07, 2007 |
$27 |
+16.88%
|
+26.18%
|
+23.92%
|
9 |
+26.18%
|
+19.37%
|
Note:
A is rewarded for those stocks following their after-hour movement trend.
CLZR seems to be only stock which erased all its after hour movement at the close. All other stocks either kept the trend going further or closed not far away from the opening price.
This study also showed the final movements when options expires (last column of table 2) normally continue the same trend even further. However, research in this article will concentrate on the same day play only.
Next, real options price will be used to illustrate the profit level for all those stocks. It is easy to scan and identify those 14 stocks in a earnings season. The trade model is based on entering the straddle(deep in the money to avoid Theta) at the market open and exiting at the market close.
|
Table 3: Real Trades Study
|
| Symbol |
SlamRate |
Earning Date |
Price |
Strike |
Enter Straddle At Market Open |
|
Exit Straddle At Market Close |
| |
Price |
Call |
Put |
Total |
|
Price |
Call |
Put |
Total |
Gain/Loss |
| ALGN |
1/5 |
Jan 30, 2007 |
$13.81
|
Straddle @ $15 |
$16.27 |
$1.1 |
$0.25 |
$1.35 |
|
$16.69 |
$2 |
$0.1 |
$2.1 |
55.55%
|
|
|
| AZPN |
3/5 |
Feb 06, 2007 |
$10.35
|
Straddle @ $10 |
$12.98 |
$2.35 |
N/A
|
$2.35 |
|
$12.8 |
$2.55 |
N/A
|
$2.55 |
8.51%
|
|
|
| BECN |
1/5 |
Feb 08, 2007 |
$21.0499
|
Straddle @ $22.5 |
$19.66 |
N/A
|
$2.85 |
$2.85 |
|
$18.85 |
N/A
|
$3.5 |
$3.5 |
22.8%
|
|
|
| CLZR |
5/5 |
Jan 23, 2007 |
$11.8
|
Straddle @ $12.5 |
$10.57 |
N/A
|
$2.55 |
$2.55 |
|
$11.62 |
$0.25 |
$1.1 |
$1.35 |
-47.05%
|
|
|
| ENER |
1/5 |
Feb 08, 2007 |
$35.46
|
Straddle @ $35 |
$30.47 |
$0.05 |
$5 |
$5.05 |
|
$29.99 |
$0.05 |
$4.9 |
$4.95 |
-1.98%
|
|
|
| FEIC |
3/5 |
Feb 06, 2007 |
$25.07
|
Straddle @ $25 |
$29.06 |
$4.3 |
N/A
|
$4.3 |
|
$31.93 |
$6.3 |
N/A
|
$6.3 |
46.51%
|
|
|
| ISRG |
2/5 |
Feb 01, 2007 |
$99.4
|
Straddle @ $100 |
$116.28 |
$14.3 |
$0.1 |
$14.4 |
|
$116.82 |
$17.1 |
$0.05 |
$17.15 |
19.09%
|
|
|
| NTRI |
3/5 |
Feb 14, 2007 |
$43.93
|
Straddle @ $45 |
$49.15 |
$4.9 |
$0.05 |
$4.95 |
|
$50.12 |
$5.2 |
$0.05 |
$5.25 |
6.06%
|
|
|
| PLXS |
3/5 |
Jan 24, 2007 |
$21.2
|
Straddle @ $22.5 |
$18.07 |
$0.05 |
$4.1 |
$4.15 |
|
$18.17 |
$0.05 |
$4.3 |
$4.35 |
4.81%
|
|
|
| SIMG |
3/5 |
Feb 08, 2007 |
$12.12
|
Straddle @ $12.5 |
$9.49 |
N/A
|
$3 |
$3 |
|
$9.3 |
N/A
|
$3.2 |
$3.2 |
6.66%
|
|
|
| STMP |
3/5 |
Feb 15, 2007 |
$14.3899
|
Straddle @ $15 |
$17.08 |
$2.45 |
$0.1 |
$2.55 |
|
$16.91 |
$2.1 |
$0.15 |
$2.25 |
-11.76%
|
|
|
| TNL |
2/5 |
Jan 25, 2007 |
$25.78
|
Straddle @ $25 |
$22.36 |
N/A
|
$2.55 |
$2.55 |
|
$21.74 |
N/A
|
$3.1 |
$3.1 |
21.56%
|
|
|
| TTEC |
1/5 |
Feb 07, 2007 |
$26.64
|
Straddle @ $25 |
$32.75 |
$7.4 |
N/A
|
$7.4 |
|
$33.66 |
$8.5 |
N/A
|
$8.5 |
14.86%
|
|
|
|
Summary:
|
Total Return:
|
145.62%
|
Note:
LCAV was not tracked for technical reasons. The miss should not have a major impact on the total return because LCAV moved further along the trend according to the results from table 2.
Slam Rate: This is the rate given from previous earnings performance of each stock. This rating does change after each earnings quarter. To view more rating details, please visit Optionslam.com Rating Report
The return of 145% is simply a sum from all 13 plays.
10(11 includes LCAV) of 14 trades would make profit. It is a very successful rate indeed.
Only one of the those three losses(CLZR) is significant. The risk is certainly lower than straight straddle plays before the earnings news.
To compare the result, table 4 shows the play of entering straddle before the earning news.
|
Table 4: Straddle Earnings Play before Earnings News
|
| Symbol |
Volatility Rate |
Earning Date |
Price |
Strike |
Before Earning |
|
After Earning |
| |
Call |
Put |
Total |
Percent |
|
Price |
Call |
Put |
Total |
Gain/Loss |
| ALGN |
1/5 |
5/10 |
Jan 30, 2007 |
$13.81
|
Straddle @ $15 |
$0.25 |
$1.5 |
$1.75 |
11.66%
|
@Open
|
$16.27 |
$1.1 |
$0.25 |
$1.35 |
-22.85%
|
| @Close |
$16.69 |
$2 |
$0.1 |
$2.1 |
20%
|
|
|
| AZPN |
3/5 |
6/10 |
Feb 06, 2007 |
$10.35
|
Straddle @ $10 |
$0.65 |
$0.3 |
$0.95 |
9.5%
|
@Open
|
$12.98 |
$2.35 |
N/A
|
$2.35 |
147.36%
|
| @Close |
$12.8 |
$2.55 |
N/A
|
$2.55 |
168.42%
|
|
|
| BECN |
1/5 |
1/9 |
Feb 08, 2007 |
$21.0499
|
Straddle @ $22.5 |
$0.35 |
$1.75 |
$2.1 |
9.33%
|
@Open
|
$19.66 |
N/A
|
$2.85 |
$2.85 |
35.71%
|
| @Close |
$18.85 |
N/A
|
$3.5 |
$3.5 |
66.66%
|
|
|
| CLZR |
5/5 |
9/10 |
Jan 23, 2007 |
$11.8
|
Straddle @ $12.5 |
$0.75 |
$1.5 |
$2.25 |
18%
|
@Open
|
$10.57 |
N/A
|
$2.55 |
$2.55 |
13.33%
|
| @Close |
$11.62 |
$0.25 |
$1.1 |
$1.35 |
-40%
|
|
|
| ENER |
1/5 |
0/10 |
Feb 08, 2007 |
$35.46
|
Straddle @ $35 |
$1.75 |
$1.25 |
$3 |
8.57%
|
@Open
|
$30.47 |
$0.05 |
$5 |
$5.05 |
68.33%
|
| @Close |
$29.99 |
$0.05 |
$4.9 |
$4.95 |
65%
|
|
|
| FEIC |
3/5 |
1/10 |
Feb 06, 2007 |
$25.07
|
Straddle @ $25 |
$1.15 |
$0.95 |
$2.1 |
8.39%
|
@Open
|
$29.06 |
$4.3 |
N/A
|
$4.3 |
104.76%
|
| @Close |
$31.93 |
$6.3 |
N/A
|
$6.3 |
200%
|
|
|
| ISRG |
2/5 |
8/10 |
Feb 01, 2007 |
$99.4
|
Straddle @ $100 |
$5.5 |
$6.3 |
$11.8 |
11.8%
|
@Open
|
$116.28 |
$14.3 |
$0.1 |
$14.4 |
22.03%
|
| @Close |
$116.82 |
$17.1 |
$0.05 |
$17.15 |
45.33%
|
|
|
| NTRI |
3/5 |
7/10 |
Feb 14, 2007 |
$43.93
|
Straddle @ $45 |
$1.4 |
$2.65 |
$4.05 |
9%
|
@Open
|
$49.15 |
$4.9 |
$0.05 |
$4.95 |
22.22%
|
| @Close |
$50.12 |
$5.2 |
$0.05 |
$5.25 |
29.62%
|
|
|
| PLXS |
3/5 |
6/10 |
Jan 24, 2007 |
$21.2
|
Straddle @ $22.5 |
$1.05 |
$2.2 |
$3.25 |
14.44%
|
@Open
|
$18.07 |
$0.05 |
$4.1 |
$4.15 |
27.69%
|
| @Close |
$18.17 |
$0.05 |
$4.3 |
$4.35 |
33.84%
|
|
|
| SIMG |
3/5 |
6/10 |
Feb 08, 2007 |
$12.12
|
Straddle @ $12.5 |
$0.4 |
$0.85 |
$1.25 |
10%
|
@Open
|
$9.49 |
N/A
|
$3 |
$3 |
140%
|
| @Close |
$9.3 |
N/A
|
$3.2 |
$3.2 |
156%
|
|
|
| STMP |
3/5 |
4/10 |
Feb 15, 2007 |
$14.3899
|
Straddle @ $15 |
$0.5 |
$1.1 |
$1.6 |
10.66%
|
@Open
|
$17.08 |
$2.45 |
$0.1 |
$2.55 |
59.37%
|
| @Close |
$16.91 |
$2.1 |
$0.15 |
$2.25 |
40.62%
|
|
|
| TNL |
2/5 |
3/10 |
Jan 25, 2007 |
$25.78
|
Straddle @ $25 |
$2 |
$1.2 |
$3.2 |
12.8%
|
@Open
|
$22.36 |
N/A
|
$2.55 |
$2.55 |
-20.31%
|
| @Close |
$21.74 |
N/A
|
$3.1 |
$3.1 |
-3.12%
|
|
|
| TTEC |
1/5 |
2/10 |
Feb 07, 2007 |
$26.64
|
Straddle @ $25 |
$2.5 |
$0.45 |
$2.95 |
11.8%
|
@Open
|
$32.75 |
$7.4 |
N/A
|
$7.4 |
150.84%
|
| @Close |
$33.66 |
$8.5 |
N/A
|
$8.5 |
188.13%
|
|
|
|
Summary:
|
@Open:
|
1496.96%
|
@Close:
|
1116.11%
|
Conclusion: the play after the big gap is safer than regular straddle play. The return is somehow also much less.
Please keep in mind that no way one can just foresee the after market move and pick those straddle plays only. To see the tracking of all straddle plays, please visit Optionslam.com Volatility Report on Earning Day.
All statistics from this report is based on earnings performance from Jan 22, 2007 to Feb 16, 2007. Market is never the same so it is no guarantee that same return can be achieved in future trading. Necessary adjustment is always required.
Note: gap opening filter is now available at here.
Please Send your comments to Optionslam Forum or send email to Simon Lee directly.
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