EARNINGS SEASON REVS up this week, and speculative trading on corporate reports will dominate the options market for the coming weeks. This is a time for investors who understand the fundamentals of stocks to use options to potentially extract extra value from their shares.
The time-honored technique for speculating on earnings reports is buying at-the-money or slightly out-of-the-money calls to benefit from an expected increase in the underlying stock price. Some speculators like to sell puts whose value will decline should the stock advance.
Both of those strategies are already evident in the market, but as this earnings season is expected to usher in a decline in earnings growth a new technique may be in order — namely the stodgy, old strategy of selling calls against long stock, which is known as over-writing.