Biogen - Pivot Point - Beware Earnings
Hey traders, I was searching for potential pivot points for long call opportunities and I came across Biogen 
BIIB and thought to myself "Hey! This looks good!"... that is until I saw they're expected to report earnings tomorrow. But otherwise, take a look at the chart above. One thing you will see...is that its been trading within a range. I highlighted this range on the chart using the labels Support and Resistance. The other thing to notice is where the stock price is relative to the Bollinger Bands. If earnings wasn't tomorrow, I would be more inclined to purchase a call here because the stock price is holding at the lower BollingerBand at 2 standard deviations. Stock price has a tendency to move back towards the 8 EMA on the daily chart above, so if we are playing the odds, this trade would be in favor to the upside. But this trade is invalidated since we have a major news event happening tomorrow.
So... let's see what happens. In my experience, if a stock breaches the lower Bollinger Band after an earnings report, it's no longer a valid long call trade. In the past, I have made the mistake in thinking with 2 standard deviations... I have a 95% chance that price will fall back within the BollingerBands within the lifespan of the trade. But often what ends up happening is the stock price moves in a "L shaped" pattern where the vertical end of the "L" is the drop after the major news event and the horizontal side of the "L" is the sideways price action the stock experiences for days ( sometimes weeks ) following the news event.
In this situation, the stock usually comes back within the 2 standard deviation range... but not until Theta decay has eaten up your call option's premium. So even if you eventually get the direction right, time will not be kind to your long call position. This is where applying the Put Credit Spread strategy comes in handy. With Put Credit Spreads, you are an option seller, rather than an option buyer. Time will erode the premiums of the spread making it cheaper to buy back later. What's even better, is if the stock moves up... then the Delta will negatively affect the puts making them cheaper to buy back.
Anyways, let's follow Biogen tomorrow and see if they beat or miss earnings and how the stock price reacts to the news. If it heads lower, we'll follow up in next weeks idea regarding the put credit spread setup.
BIIB and thought to myself "Hey! This looks good!"... that is until I saw they're expected to report earnings tomorrow. But otherwise, take a look at the chart above. One thing you will see...is that its been trading within a range. I highlighted this range on the chart using the labels Support and Resistance. The other thing to notice is where the stock price is relative to the Bollinger Bands. If earnings wasn't tomorrow, I would be more inclined to purchase a call here because the stock price is holding at the lower BollingerBand at 2 standard deviations. Stock price has a tendency to move back towards the 8 EMA on the daily chart above, so if we are playing the odds, this trade would be in favor to the upside. But this trade is invalidated since we have a major news event happening tomorrow. So... let's see what happens. In my experience, if a stock breaches the lower Bollinger Band after an earnings report, it's no longer a valid long call trade. In the past, I have made the mistake in thinking with 2 standard deviations... I have a 95% chance that price will fall back within the BollingerBands within the lifespan of the trade. But often what ends up happening is the stock price moves in a "L shaped" pattern where the vertical end of the "L" is the drop after the major news event and the horizontal side of the "L" is the sideways price action the stock experiences for days ( sometimes weeks ) following the news event.
In this situation, the stock usually comes back within the 2 standard deviation range... but not until Theta decay has eaten up your call option's premium. So even if you eventually get the direction right, time will not be kind to your long call position. This is where applying the Put Credit Spread strategy comes in handy. With Put Credit Spreads, you are an option seller, rather than an option buyer. Time will erode the premiums of the spread making it cheaper to buy back later. What's even better, is if the stock moves up... then the Delta will negatively affect the puts making them cheaper to buy back.
Anyways, let's follow Biogen tomorrow and see if they beat or miss earnings and how the stock price reacts to the news. If it heads lower, we'll follow up in next weeks idea regarding the put credit spread setup.
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