Trading YHOO Earnings Projected Move

YHOO will be reporting its earnings after the close on Tuesday, 10/15/13. For those that are holding YHOO or planning to trade YHOO through earnings report, here is the current option market pricing for the expected move from the earnings report; it is expect YHOO to move +-6%, and that is equivalent to approximately $2.10 from Friday's closing price. From the intraday chart below, the upside price move level is near the upper price channel and the downside price move is near the last pivot low off the lower price channel.

(click on the chart to get an enlarge view)


Currently, the implied volatility or IV is in the 60% range. After the earnings report, the premium paid for the extra IV will disappear and the directional option holders will bear the bulk of this premium. The inflated IV prior to any event, especially on earnings report, is one major reason for not holding directional options through earnings. One possible mean to mitigate this is to buy call or put spread, depending on ones bias whether the price will go up or down based on earnings. By buying spread with very similar implied volatility, the premium paid for the IV will be minimal as the IV premium from the short leg of the spread will compensate for the IV premium paid for the long side of the spread. If one is planning to trade through earnings, one could setup either a bullish or bearish spread with OTM options one or two weeks prior to earnings report that has the possibility to provide 2-to-1 reward to risk ratio, where the maximum potential loss is 100% paid for the spread (that 100% loss should not exceed one's normal risk per trade).

One advantage of using options to trade through earnings is the risk is defined, most one can lose is the premium paid for the options. But if one is holding the stock, if the price of the stock gap down or drop quickly below the defined risk level, then one could incur excessive loss.