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Selling puts with the aim of capitalizing on inflated implied volatility prior to an earnings release counts as an investment strategy only for those who would be willing to own the underlying stock outright.
Without a crystal ball, there’s no way to tell whether the post-earnings spike in Tesla Motors will hold through June options expiry, but for investors who wrote naked puts before earnings, the combination of a price surge and the fall in implied volatility makes for a profitable exit.
When investor worry in the run-up to a quarterly earnings announcement pushes implied volatility well above historical levels, naked put writing provides an opportunity to profit from the inevitable fall in implied volatility after results are in.
Now that the extreme levels of worry surrounding Apple’s earnings have subsided, and options prices have come back down to Earth, investors who wrote high-priced naked puts prior to earnings can close for a quick profit, await expiry and hope to keep the entire option premium, or consider rolling out to a future month.
With Apple’s quarterly earnings report just around the corner, prices for the stock’s options are being pushed upward by a spike in implied volatility far above historical levels. For investors who would be willing to buy Apple anyway, naked put writing provides an opportunity to profit from the inevitable fall in implied volatility once the results are in.
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