Let’s face it. Learning a new skill in any domain can be quite a challenge.
Let alone for an activity as complex as online trading.
In order to make it less scary for beginners, we are offering this entry level tutorial centered around Best of Options trading for “Dummies“.
Options Trading For Dummies: The Plan
The most important piece of advice I can offer beginners is to stay away from stocks just before their Earnings.
Rather, we recommend you wait after the Earnings are announced.
Then use this gallery of Post Earnings History to trade between the day after and the third day.
Historically, that is where most of the safest trades will be found.
Best of Options Trading For Dummies: The Execution
Here is the Gallery of my current Watch List with their Post Earnings Performance since 2017.
Stocks Post Earnings Performance History
The guiding principle is to always follow the trend.
If nothing else, this data should definitely help isolate opportunities of trade.
How so ?
By looking at the historical trend, you can spot stocks that more likely to move.
For each stock in the gallery, I am providing the percentage change between the Open and the High and the Open and the Low.
This is available for the three days following the Earnings of that stock.
This means that the most attractive stocks to consider for Options trading in these three days are the ones with the biggest percentage move in either direction.
I would go even further and share the results of stock simulations I have completed over the years.
It may be common sense that after a stock has a strong momentum in a given direction, it usually continues that momentum on it s first day Post Earnings (ER).
Here is a simple simulation for Momentum trades on each direction:
- If a stock is trading Up 8% or more after ER, the Momentum Long buys 100 shares up to a limit of 2%
- If a stock is trading Down -8% or more after ER, the momentum Short buys 100 shares up to a limit of 2%
- We applied some filters about the daily volume in order to address liquid stocks only. Minimum daily volume was 200000 shares
Almost 57% of the trades were winners for the Momentum Long vs. 54% of winners for the Momentum Short over a period of almost three years.
IT is important to remember that these results are for trading stocks, not stock Options.
Also, the simulation is strictly for the Day after the Earnings.
The relevance of this data is to show you the opportunities that exist even on simple momentum trades after the Earnings.
Below is a video detailing our Full Quant Analysis approach to trading stocks after Earnings.
Should you master this strategy, you will definitely become a graduate of Options trading for Dummies series of tutorials.
As you already know by now, a stock that moves a great for options traders who can benefit from the moves while risking smaller capital than if they were to trade the stocks.
BUT WAIT: THERE IS MORE
Momentum trades are not the only type of Post Earnings trades.
May I submit to you the results of a couple of Reversion trades.
- If a stock is trading between ]-3%;-0.5%[ after ER, buy 100 shares (Long trade)
- If a stock is trading between ]0.5%;+3%[ after ER, sell 100 shares (short trade)
- Analysis time frame from January 2015 to July 2018
Over three and half years, this strategy on stocks has almost a 57% winning rate by just focusing on the first Day after Earnings.
Similarly, the opposite strategy has almost 58% win rate with twice the umber of trades.
There is value in just that observation.
There were more opportunities with stocks that started initially trading Up between ]0.5%;+3%[ and ended up going the opposite direction.
The overall data on the Reversion shows that there are still plenty of winning trades available even when the stock does not display a major move Post ER.
BREAKING IT DOWN TO THE BEST TRADES
In this section, we are going to highlight our best stocks to trade post earnings.
By sharing some of the patterns we have observed over the years, we hope to give you an edge when it comes to setting up your post Options trades.
Of course, historical behavior is not a guarantee of future performance hence one should always take these studies with a grain of salt.
After each ER, this stock “likes” to take its time before beginning a movement in either direction.
Therefore, patience is needed for it to reveal its initial direction .
Of course, one can always strangle it. The expected daily more in either direction is typically $1.
On the second Day, the general pattern is a candle of opposite color to the first Day.
The expected move Post ER on this stock is about $10 for that day.
It may appear as a big move but that is less than 4% for this stock valued at over $300.
A Strangle may well be suited as well depending on how many days you want to have.
CONOCOPHILLIPS (Ticker: COP)
The main thing on this stock is its propensity to do head fakes.
Mostly, it will start trading lower before blasting to the upside. Jan 31 2019, July 30 2019 and October 29 2019 all had the same pattern.
We provided the historical performance of over 50 familiar stocks Post Earnings in this guide to options trading for dummies.
This data is meant to help traders feel confident about the availability of trades after when a direction has been determined.
Then, we introduced four strategies plays: Momentum Long and Short and Reversion Long and Short.
I hope you found this discussion valuable for your trading methodology.
If you would like to increase your knowledge and further your understanding of these concepts, may I suggest this similar article.
If you would like see how we put this information in application to make money trading Options, click here.
Please leave us your thoughts, comments, experiences or questions about this content so that we can continue to tailor it to your needs.