Option Trading Strategy Results: 27-Jan-2017 Weekly Expiration


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Sellers of volatility generally had a better time of it in the options market for the weekly expiration of 27-Jan-2017.  However, there were pockets of profitability for buyers, especially on the call side.

Like the last couple of weeks, a majority of option purchases came back as losers during the week.  It was not quite as lopsided as it has been in recent weeks, though there were still significant losses seen among put buyers.

Unhedged ATM Straddle positions returned winners 35.6% of the time, leading to an average loss of -8.4%.  Unhedged 25-Delta Calls were winners 27.2% of the time, but there was enough profitability from the winners to more than offset losses from the losers.  The average gain for that strategy was +55.6% for the week.

On the put side, things were more bleak for buyers of volatility.  25-Delta Puts returned winners just 7.9% of the time, leading to an average loss of -68.8%.

Hedging Comparison

It was a mixed week for hedging.  The strategy had a major impact on the put side, significantly cutting losses for 25-Delta Put bets.  For 25-Delta Calls, hedging was a significant hindrance, either cutting profits dramatically or leading to outright losses, depending on how the hedge was set up.

For ATM Straddle position, hedging had only a small impact.

As noted above, unhedged 25-Delta Put positions had an average loss of -68.8%.  Hedging once cut the average loss to -13.5%.  This was curtailed even more with daily hedging.  That strategy led to an average negative showing of -8.6%.

For 25-Delta Calls, hedging once turned a positive return of +55.6% into an average loss of -7.0%.  Daily hedging still had a gain, on average, but significantly below that of the unhedged position.  Daily hedged 25-Delta Calls had an average return of +7.0%.

ATM Straddles were little impacted by hedging.  Unhedged, they lost -8.4% on average, compared to -8.6% with single hedges and -4.1% with daily hedges.

Standouts

Mattel (MAT)

Over the last few weeks, we've brought you a number of stories about retailers who have suffered in the wake of a disappointing holiday season.  This week, it was toy maker Mattel's turn in the guillotine.

The company reported a quarterly profit that fell from last year, dropping to $0.52 per share compared to a figure of $0.65 per share in the same period last year.  The bottom line was also below the $0.71 per share expected by analysts.

On the news, shares plunged on Thursday, dropping $5.57 on the session to $25.99.  This took MAT to a new 52-week low.  The stock stabilized on Friday and finished the week at $26.49.

Unhedged 25-Delta Puts for MAT had an average return of +807.3% for the week.  Unhedged ATM Straddles had an average return of +271.6%.

Verizon (VZ)

Telecom giant Verizon also suffered in the wake of its quarterly report.  Earnings at the company dipped to $0.86 per share for its fourth quarter, compared to $0.89 per share last year.  Analysts had expected the bottom line to hold steady at $0.89 per share.

On the news, shares of Verizon dropped on Tuesday, falling $2.29 to $50.12.  With the decline, Verizon dropped to its lowest level since early December and fell below its 50 and 200-day moving averages. The retreat continued in subsequent days and VZ eventually finished the week at $49.60.

In other news during the week, the Wall Street Journal reported that Verizon was exploring a combination of Charter Communications.  The paper said that Verizon's CEO has made a preliminary approach to officials close to Charter, though no deal has been struck yet.

Unhedged 25-Delta Put positions for VZ had an average gain of +811.9% for the week.  Unhedged ATM Straddles had an average return of +162.6% for the week.

IBM (IBM)

IBM continued to gain ground early this week, following up on a strong post-earnings performance the previous Friday.  After the closing bell on January 19, the tech giant reported better-than-expected quarterly earnings.  Despite dipping initially in after-hours trading, shares of IBM broke out to a new high in Friday's session, climbing by $3.74 to finish at $170.55. 

The advance continued this week, especially on Tuesday and Wednesday.  The stock reached as high as $179.25, before moderating a bit.  It closed out the week at $177.30.

Unhedged 25-Delta Calls for IBM had an average return of +1381.8%.  Unhedged ATM Straddle positions posted an average gain of +227%.

Wynn Resorts (WYNN)

Casino operator Wynn nominally missed expectations with its fourth-quarter earnings.  The company reported earnings of $0.50 per share, down from $1.03 per share last year and well below the $0.86 per share expected by market analysts.

However, the stock rose sharply following the earnings release. Instead of wallowing in the earnings miss, investors focused on better-than-expected revenues and on a strong early performance from the company's new casino in China.  The Wynn Palace in Macau posted revenue of $418.7 million in the quarter. 

The Investor Business Daily noted that a number of analysts were positive following the earnings release, quoting one who said the results suggested that the Palace had ramped up "faster than we thought."  The paper also pointed out that the strong start for the Macau property comes at an auspicious time: just ahead of the Chinese New Year celebrations, which began this week.

Unhedged 25-Delta Call positions for WYNN had an average return for the week of +1253.2%.  Unhedged ATM Straddles had an average gain for the week of +227.7%.