Small binary option contracts allow traders to hedge or speculate short-term risk around quarterly earnings announcements
Unique new “corporate action” contracts that enable trading on the earnings per share (EPS) of major corporations correctly gave traders an opportunity to predict today’s earning miss by Google (GOOG), the HedgeStreet Exchange reported.
The new EPS contracts traded on HedgeStreet, the first Internet-based, government regulated exchange where traders can hedge against or speculate on economic events, indicate the market’s sentiment on outcome of quarterly EPS results.
After today’s stock market close, Google announced EPS of $3.56 against a “street consensus forecast” of $3.62. Several HedgeStreet’s traders were short these contracts (thus expecting the earnings miss) thus enabling them to either hedge their Google exposure or profit from the announcement directly.
The HedgeStreet Exchange has listed EPS binaries on Wal-Mart, Inc. (WMT), ExxonMobil (XOM), 3M (MMM); Apple (AAPL); Caterpillar (CAT); Google (GOOG); Halliburton (HAL); Intel (INTC); Microsoft (MSFT); NYSE Euronext (NYX); Time Warner (TWX), Yahoo (YHOO), Pfizer (PFE), Caterpillar (CAT), Disney (DIS) and Citigroup (C). All EPS binaries on the HedgeStreet Exchange trade until the day prior to the next quarterly earnings announcements of each of the corporations.
Although the EPS contracts on HedgeStreet are new instrument offerings, early indications are that the EPS contracts will continue to reflect market sentiment to a greater and greater degree as market participation increases within these unique listings. More EPS contracts, based on the earnings for additional firms, will be listed in the future.
Russell Andersson, Vice President of Instrument Origination and a co-founder of the HedgeStreet Exchange, said: “HedgeStreet’s EPS contracts are designed for investment professionals and traders who have or wish to gain exposure to the risks associated with the earnings announcements of large corporations. Previously their only means of action was to buy or sell the stock. With EPS contracts they can custom tailor their risk or profit expectations, and their interest in these products is growing.”
The new contracts are binary options, with a payout value of $100 each. As with all binaries listed on The HedgeStreet Exchange, traders have the opportunity to “buy” if they believe the reported value of a company’s earnings will be above a certain level, or “sell” if they believe the number will be reported at or below that level. If, on the expiration date, the reported EPS value is greater than the payout criteria value, the “buyer” receives $100. If the reported value is equal to or less than the payout criteria value, the “seller” receives $100. For example, traders could buy the “ExxonMobil EPS greater than $1.75” contract for $20, and if they are correct they would receive $100, for a total profit of $80 per contract. If they are incorrect, they lose their initial investment of $20. A trader’s risk is limited to the cost of acquiring a position, such that the risk and reward of the trade is known in advance, and it is not possible to lose more than was intended. Additionally, participants may trade out of their positions prior to contract expiration in an effort to take profits or cut losses. Liquidity on the exchange is provided by professional market makers including Susquehanna International Group (SIG) and DRW Trading Group (DRW).