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A Bullish Options Bet on a Rallying Fintech Into Earnings

February 5, 2024
minute read

Navigating the intricacies of trading stocks around earnings announcements requires careful consideration, and yet, we find an opportunity to leverage lower-than-average longer-dated options premiums in an e-commerce payment services company, shaping a cautiously optimistic position leading into earnings.

Stock investing, in general, is a complex endeavor, and the challenges intensify when anticipating a catalyst such as earnings. Several key challenges arise when contemplating trading stocks ahead of or during earnings, including:

Volatility:

  1. Increased Price Swings: Earnings announcements often trigger heightened volatility, with unpredictable positive or negative surprises causing sharp price movements that are challenging to anticipate and manage.
  2. Options Pricing: Options premiums tend to rise with increased volatility, potentially making it costlier for traders to establish long positions before earnings, occasionally tempting them to sell perceived rich premiums.

Uncertainty and Surprises:

  1. Unpredictable Outcomes: Predicting a company's earnings or management's statements is difficult, and anticipating market reactions to these elements is even more challenging.
  2. Guidance: Forward-looking statements during earnings calls can introduce immediate and unpredictable impacts on stock prices.

Market Expectations:

  1. Already Priced In: Sometimes, market expectations are already factored into stock prices by the time earnings are announced, leading to unexpected responses like a "sell the news" reaction.
  2. Analyst Expectations: Market reactions may hinge more on how actual earnings compare to analyst expectations rather than the earnings themselves.

Options Spreads:

  1. Spread and Slippage: Around significant announcements, bid-ask spreads in options can widen, potentially increasing trading costs and slippage.

In certain scenarios, the options market may not foresee substantial moves, creating an opportunity. One such case is Fiserv (FI), where the implied move after earnings aligns with the long-term average, presenting a potential opening. The current options market indicates a likely 3.5% move, consistent with the 3.2% historical average. Despite Fiserv's recent strong performance, options premiums, especially for longer-dated options, have decreased.

An intriguing strategy in this context is the "poor man's buy-write." This involves purchasing longer-dated calls and writing nearer-dated calls against them to offset decay or "theta."

The Trade:

  • Sold Feb. $150 Call for $1.15 (Feb. 9 weekly expiration)
  • Bought June $145 Call for $8.70

Fiserv, specializing in e-commerce services, operates globally, focusing primarily on the United States, which contributed 85% of its recent fiscal year revenues. The trade strategy involves selling the weekly Feb. 9 $150 calls, aiming to leverage additional call or put options after their expiration to continue collecting premium over time.

This carefully constructed approach seeks to navigate the complexities of earnings trading while capitalizing on an opportune moment in Fiserv's options market, offering a nuanced and modestly bullish stance for investors.

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Author
Cathy Hills
Associate Editor
Eric Ng
Contributor
John Liu
Contributor
Editorial Board
Contributor
Bryan Curtis
Contributor
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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