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Futures for the S&P 500, Nasdaq 100 and Dow Jones industrial average rose late Monday, led by the big-cap Nasdaq 100 as FANG stock Netflix (NFLX) shot up 10% in late trading following booming Q2 subscriber growth and strong Q3 guidance. Netflix investors are cheering, but the risk-reward from earnings reports on growth names such as Apple (AAPL), Nvidia (NVDA), Amazon.com (AMZN) and Facebook (FB) is high.
XAutoplay: On | OffIBD has devised an earnings options strategy so you can reap the rewards of well-received earnings reports from the likes of Netflix and Apple.
Why go through the bother? Check out how Netflix, Apple, Nvidia, Amazon and Facebook traded after recent earnings reports. Sometimes investors scored big gains, but there were painful losses too.
- Netflix: After its Q1 2016 earnings report, Netflix tumbled 13% the following day. After its Q2 2016 report, Netflix plunged 13% again. Investors might have wanted to steer clear of Netflix after that. But after its Q3 report, Netflix skyrocketed 19%. After its Q4 report, shares rose 3.9%. Following its Q1 2017 report, Netflix fell 2.6% the following session and 2.5% the day after that, though the stock quickly bounced back.
- Apple: Here is how Apple traded the day after earnings reports for the last several quarters: -6.6%, -6.3%, +6.5%, -2.25% (and kept falling), +6.1% (and kept rising) and -0.3%.
- Nvidia: Here is how Nvidia traded the day after earnings reports: +15.2%, +5.6%, +29.8%, -2.4% (and -4.6% the following session) and +17.8% (and kept soaring).
- Amazon: Here is how Amazon moved on the day after its most recent earnings reports: -7.6% (and kept falling), +9.6% (and kept rising), 0.8%, -5.1% (and kept falling), -3.5% and +0.7% (but kept rising).
- Facebook: Here is how Facebook moved after its last several earnings reports. +15.5%, +7.2%, +1.35%, -5.6% (and selling continued for several weeks), -1.8% and -0.6%.
So what is the earnings options strategy? Look for stocks in or near buy zones, usually within proper bases. Then find a just-out-of-the-money weekly or monthly call option, so the strike price is just above the underlying stock price. Every strike price comes with a premium. Divide the premium, or option cost, by the stock price, and multiply by 100. That’s the downside risk as a percentage. You want to look for options trades that will minimize your downside risk to no more than 4%.
Nasdaq 100 futures rose 0.3% above fair value Monday evening, while S&P 500 index futures climbed 0.1%. Dow industrials futures advanced fractionally.