In this article, we will reveal what is the best day to trade stocks options and show you how we applied this knowledge to generate 200% profit on the Kroger stock (Ticker:KR) this past week.
Wondering how to make money consistently trading options ?
Or How to avoid losing positions because of badly timed entries ?
Then read further for we will show you how to navigate your trading plan through the timelines.
Table of Contents
Best Day To Trade Stocks Options: Why Gamble…
For both beginners and well seasoned traders, figuring out the best day to trade stocks options is critical.
Because options tend to lose their intrinsic value each day, Patience is one of the most important trait for traders to avoid major drawdown.
Drawdown is when your position starts going in the opposite direction of gains.
All traders are accustomed to the fact that stocks tend to move significantly following their quarterly Earnings releases.
This knowledge can create in some traders the desires of: easy money, fear of missing out and instant gratification.
I have witnessed many times in Trading rooms, the following question minutes before the close: “Anybody playing XYZ stock ER ? ” .
This question is from traders looking for a quick win or so they think.
I do not know about you but for my many years in the markets, I still cannot predict accurately what the market reaction will be for any stock after their Earnings.
One can be lucky now and then but for the most part, traders who gamble (yet, this is the proper word) before the Earnings Release end up losing money in the long run.
Best Day To Trade Stocks Options: When You Can Thrive
Instead, we recommend waiting for the Earnings Release is out and the initial reaction of the market.
There are two main ways options traders lose money by gambling before Earnings:
- Guessing the wrong direction of the Market reaction
- Guessing the correct direction but (assuming you even have the correct strike) Implied Volatility reduces Significantly
We will delve on the second bullet point in length in our upcoming discussion on options chain.
For now, I can tell you that Market Makers ALWAYS increase the options (both calls and puts) volatility before Earnings.
This is done to reflect the expected movement from the pending uncertainty of the news.
Volatility is one of the variables embedded int he price of options. The higher the volatility the higher the price of options when all other variables are constant.
Once the news is released, the uncertainty is gone.
Consequently, Market Makers reduce the volatility in the options.
This means that even if the stock does not move at all, options are more expensive before the Earnings news than after.
How much more, you ask ?
Allow me to illustrate through the NFLX option chain chart below.
I am choosing the above chart because it was after I understood that about Earnings Release “gamble” that I was able to put a proper methodology in place and start generating consistent gains.
What are we learning from the chart:
- You may have guessed the correct direction: NFLX gained over $7 dollars or 5.7% (Top small red rectangle)
- You may have even picked the correct Strike: Let’s say Jan17 137 Calls (Each row represents a strike for the Jan17 Expiration)
- Result: at the time this snapshot was captured, you were losing over 10.5% on those Jan17 137 Calls !!!
- How is that possible ? Because The Implied Volatility (two vertical orange columns) has reduced 97.49 %
If there is just one thing to take away from this post, let is be that chart.
It is the very embodiment of what Market Makers do day in and day out on post Earnings Release.
Yet many traders continue to gamble on options before Earnings Release.
If you can avoid FOMO (Fear Of Missing Out) before Earnings Release, you can set yourself up for nice opportunities to make money after.
During Earnings seasons (there are 4 in a year ) as we shared in this article, you will even have to make of a selection of the best opportunities.
For that, we developed an easy method to measure which stocks move the most.
Before we shared that, let’s establish that we typically will use weekly options for our trades.
Since weekly options expire on Fridays, if you enter a trade on Thursday, it will be cheaper than on Monday or Tuesday assuming no movement.
Here is a view of a simple research we use in order to select among different stocks reporting Earnings on the same day or week.
In the above table, we learn before Earnings the tendencies about Alcoa stock 3 days after Earnings Release.
We use this for each stock reporting on a given day/week to select the stock(s) that have the highest historical move(s).
You can wonder: How do we know if a stock will move as much as it has moved in the past ? We don’t !!
But, I can tell you that most of the volume in the market is generated by machines.
These machines are knows as Algos. If there is one thing I have seen algos do time after time, it is to repeat past moves.
Over my years in the Market, I can say historical analysis is over 67% accurate.
I have used it successfully and continue to include it as one of the methods of finding successful trades.
We already know that the best day is always the day after or the same day if the earnings release is before the market open.
Now, if that day is Thursday (day after or before market open), that makes those weekly options very cheap.
Thus making Thursday and Friday our two best days to trade options.
We previously published the Friday Bulls research for all days outside of Earnings Release.
Now, we are adding that Post Earnings Release on Thursday and Friday as the best to trade stocks options.
This does not mean that other Post Earnings on other days do not provide opportunities.
We are simply stressing on the fact that due to the nature of weekly options, cheaper entries are available on Thursdays and Fridays.
KR Puts on Thursday Dec 5
Well, such was the case this past Thursday when Kroger (Ticker:KR) shared their earnings before Market Open on December 5, 2019.
The pre-market was a bit of a wild ride. Initially KR went down -2.6%.
Then just a few minutes before the open, it erased all previous losses to settle at the previous day close around $27.6.
After the open, the Dec13 26.5 Puts went from 19 cents low to 53 cents in less than 2 hours.
That is over 100% gains. As you can imagine, the Dec6 26.5 Puts must have generated a much bigger profit.
I do not have access to that at the time of this writing because they have already expired.
The move down of about one dollar is not something random. To me at least.
Remember our little historical table above and the question about how reliable it is ?
Well, I looked at it for KR on Thursday for KR is pre-market.
I put it a limit entry order for the Dec6 27.5 Puts. That order was not filled because my limit was too low.
I forgot about it before I was busy managing other positions.
Therefore, I missed an easy opportunity on Thursday to make some serious gains on those puts.
KR Calls on Dec 6 for 200% Profit
The other positions that kept me busy made good money but still I was a bit disappointed for not taking advantage of the historical study on Kroger post earnings moves.
I did not wait long to redeem myself.
The same post earnings historical study (as the one I shared for Alcoa) reveals that the day after Earnings (Day +1 on that table), KR usually moves in the opposite direction of the day of the earnings.
I guarantee you I do not make this stuff up.
I have been astonished many times by the accuracy of historical analysis.
So just around the close on Thursday, I made sure I entered the Dec6 27 Calls as the closing was around $26.80.
I picked the $27 strike because the estimated move from historical was calling for a price up to $27.50 on Friday.
I wanted to be on the safe side to be in the money in that trade as soon as possible.
Since the Dec6 27 Calls were cheap enough (9 cents per contracts), I opted for those.
I captured below the fills on Thursday, December 5, 2019 and the sell orders execution the next day.
So, we bought the Dec6 27 Calls for 9 cents and sold them using our scaled exit technique for 30 cents and 31 cents.
That represents 200% gains for this overnight swing trade.
Notice that our technique did not help up much here (just $3 more despite waiting one hour and 18 minutes later.
But what if I told that it would have if we waited much longer as the Dec6 27 calls were trading over 53 cents much later in the day.
We were content with our 200% and sold the second batch only because the position retreated a bit on Friday expiration,
we have learned to take our gains and run.
Live to Come back and Fight another day.
We learned that the market offer low risk opportunities on Thursday and Fridays especially for Post Earnings Release.
Historical analysis can help determine the size of the moves post earnings and thus help you as a trader to focus on the highest moving stocks.
That knowledge was successfully applied to generate 200% a day later despite missing the first move on the day of the earnings release.
We hope you enjoyed reading this article as much as we did in writing it.
Let us know your thoughts in the comments section below.