A Bullish Options Bet on a Rallying Fintech Into Earnings

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.

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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:

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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.
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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.
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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.
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2. Guidance: Forward-looking statements during earnings calls can introduce immediate and unpredictable impacts on stock prices.
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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.
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2. Analyst Expectations: Market reactions may hinge more on how actual earnings compare to analyst expectations rather than the earnings themselves.
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Options Spreads:
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1. Spread and Slippage: Around significant announcements, bid-ask spreads in options can widen, potentially increasing trading costs and slippage.

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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.

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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."

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The Trade:

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

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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.

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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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