Trading Options Around Earnings: Exxon Mobil (XOM)

by Phil on February 7, 2013

in Options

Whether you are trading binary options, weekly options, or plain vanilla options, earnings announcements present great opportunities to profit off of event volatility (or lack thereof) in the underlying asset. Today we highlight Exxon Mobil (XOM) options and discuss how smart options traders take advantage of high probability setups around earnings announcements.

Trading Options Around XOM Earnings

trading options around xom earnings

Before jumping into the mechanics of this high probability trade we need to review briefly the anatomy of the price of an option. Remember that an option’s price, while quoted as a pair of bid / ask values, is in reality the sum of two components. The current market price is the combination of the extrinsic and intrinsic components of the individual option contract.

The extrinsic component can comprise the entirety or only a variable portion of the market price of an option. All options contain at least a small amount of extrinsic component.

The intrinsic component of an option may comprise the majority of the value of an option, as for example a deep in-the-money option.  Conversely, an individual out-of-the-money option routinely contains no intrinsic value whatsoever.

As an example, consider two current option prices from the Apple (AAPL) option chain as the price of the stock is around $450. The deep in-the-money March 400 call is priced at $54; it consists of $50 of intrinsic premium and $4 of extrinsic premium. In contrast, the out-of-the-money March 500 call is priced at $2.60. It contains $0 of intrinsic value and $2.60 of extrinsic premium, or the entire price of the option. Continue reading...

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