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As geopolitical uncertainty continues to simmer under the surface, we like calls on General Dynamics Corporation (NYSE:GD) before earnings later this month.
The operative word there is “before.” As you can see in the image below, implied volatility levels tend to ramp up before an earnings announcement because the uncertainty regarding how the stock is going to react to the announcement escalates. So, with trades held through earnings announcements, even if the value of the underlying stock starts to move in the anticipated direction, the implied volatility of the options also declines post-earnings.
Long options like what we’re recommending on GD are long Vega. This means that when implied volatility increases, it has a positive impact on the premium of the options — hence the appeal of trading before earnings.
We are also expecting General Dynamics stock to benefit from a continued buy-back program in the short term that investors will likely continue to price in before the release. This position also provides a little bit of a hedge within the industrial sector while the market is so bullish.
‘Buy to open’ the GD November 220 Calls (GD171117C00220000) for a maximum price of $1.50
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
Most recently, John and Wade are co-options strategists of Turbo Trader Live — a live, interactive trading room service that runs two hours every trading day the market is open. Turbo Trader Live focuses on long call and put options, as well as long and short vertical spread strategies. Find out how to get in on the live trading action and start making real profits by clicking here.