And how options traders can profit with the long straddle strategy
It's officially earnings season, with a handful of blue chips and big-cap stocks reporting this week. What's more, there are still hundreds of notable companies still on deck to report soon. Against this backdrop, we decided to take a look at some stocks that could make big moves on the charts, if past is prologue -- including Nucor Corporation (NYSE:NUE) and Nvidia Corporation (NASDAQ:NVDA) -- and how options traders can capitalize with the long straddle strategy.
ABCs of Long Straddle Options Trades
First, a long straddle consists of buying a call option and a put option with the same strike and expiration date. By doing so, the buyer stands to profit from a big stock move in either direction, and will make money if the underlying shares perforate one of two breakeven rails by options expiration: the strike minus the initial premium paid for the straddle, on the downside; and the strike plus the initial premium paid, on the upside. The maximum risk on the trade is the premium paid at initiation.
Crunching the Numbers
That said, Schaeffer's Senior Quantitative Analyst Rocky White crunched the numbers to find stocks that have generated big bucks for straddle buyers over the past two years. Specifically, White looked at only optionable stocks that trade at least a million shares a day.
The data below assumes you purchased an at-the-money straddle 17 days before expiration, starting at the beginning of 2016. This is similar to buying a straddle today using options that expire Friday, Feb. 16. It also assumes you held the position through expiration, and closed the straddle at intrinsic value.
Straddles That Made the Biggest Bucks
Using the method above and going by the average straddle return, the table below shows the top 20 stocks for straddle plays over the past two years. It also shows the median straddle return, the percent that were positive, and the percent that would have doubled your money. The last column shows the percentage of the straddles that were positive due to the call option (meaning the shares moved north of the straddle strike, as opposed to south).
Leading the pack is steel stock Nucor. The average straddle return for NUE since early 2016 was 41.6%, with more than half positive due to the call side. At last check, the shares of Nucor were up 1.2% at $69.84, and touched a nine-year high of $70.48 earlier this month.
The company is, in fact, set to report earnings next Tuesday, Jan. 30, and buying a straddle at the February 69 strike would run you $4.43 ($2.46 for the call; $1.97 for the put). That would make your breakeven rails $64.57 and $73.43 -- a roughly 7.5% downside move from current levels, or a 5.1% upside move. Over the past eight quarters, Nucor stock has averaged a move of just 2.5% in the day after earnings, though, regardless of direction.
Stocks With Most Winning Straddles
The stocks below wouldn't have earned you the most money with their straddles over the past two years, but they turned out winners more consistently than others. Once again, NUE stock topped the list, with 74% of straddles over the past two years generating gains for buyers.
Straddles That Doubled Most Often
Finally, below is a list of the straddles that doubled most often in the past two years. These stocks provided a number of opportunities for big short-term gains for those traders able to time volatility.
Chip stock Nvidia led the pack, with 26% of straddles from the past year doubling -- mostly due to the call side. The shares have been red-hot for quite a while, and notched a record high of $240.49 earlier today. What's more, Nvidia is set to report earnings on Feb. 7.
Buying a February 240 straddle would run you $22.95 ($11.35 for the call; $11.60 for the put). That means you'd need NVDA stock to either fall below $217.05, or rally atop $262.95, by the close on Friday, Feb. 16. From the equity's current perch at $239.08, that would represent a move of roughly 9% lower or 10% higher. Over the past eight quarters, Nvidia stock has averaged a one-day post-earnings move of 11.3%, regardless of direction.
Meanwhile, 3-D printer manufacturer 3D Systems Corporation (NYSE:DDD) also caught my eye, as it's appeared on all three of the lists above. The stock's straddles over the past two years generated an average gain of 30%, with 62% of them winners, and 24% of them doubling. However, the company isn't expected to report earnings until late February.