If one wants to learn how to trade Stock Options, one must understand the impact of dates and time.
By time, we are not just talking about the time of the day,
but more precisely about the calendar days themselves.
HOW TO TRADE STOCK OPTIONS: ECONOMIC CALENDAR IMPACT
Stock Options are impacted by time as we have discussed in a previous chapter.
But more importantly, the specific time of the year has a great impact
the opportunities available to the traders.
Earnings season present volatility in the market that stock options traders can take advantage of.
There are four main Earnings seasons each year as outlined below:
- 4th Quarter Earnings: January 15 through February 15
- 1st Quarter Earnings: April 15 through May 15
- 2nd Quarter Earnings: July 15 through August 15
- 3rd Quarter Earnings: October 15 through November 15
A few companies fall outside of these window but the same opportunities are present for them.
Many Stock Options traders (should we use the more appropriate word gamblers) try to guess the reaction of the market to the earnings reports before the companies publish them.
This is possible the worst way How to trade stock Options because the risk always outweighs the reward every single time.
HOW TO TRADE STOCK OPTIONS AROUND EARNINGS REPORTS
Let’s say Amazon (ticker: AMZN) is set to report after the market close on Thursday.
So gamblers will put their bets on the bullish (stock to go up) or bearish (stock to go down) by buying calls or puts respectively.
Their hope is to benefit from the price variation in the stock to generate big profits on the options.
It is not rare for a stock to move 5% in either direction after reporting quarterly earnings.
However, the options are set such that most of the moves are accounted in the price of the options beforehand.
Gamblers can be lucky a few times but in the long run, this is not a good strategy.
The best way to play earnings reports is by far to wait after the report come out.
We did so successfully twice on Amazon (Ticker:#AMZN) and Western Digital (Ticker:#WDC)
as outlined in our series: The Best Options Strategies.
Federal Open Market Committee (F.O.M.C) Meetings
These meetings have never been as impactful as in recent years.
They bring with them great volatility for the entire market for about 90 minutes after the decision on monetary policy (mostly interest rates cut or not) is announced.
The wise approach is not to have any open position past 2pm Est on the Wednesday of the release of the Fed decision.
The last 30 minutes of that day before the close often provide opportunities for quick day trades.
Below is the 2019 calendar as shared in early 2018.
United States Non-farm Payrolls
Since January 21 2017, Non-Farm Payrolls monthly numbers have taken an unprecedented attention in the market.
This report comes out 8:30AM EST on the first Friday of each month and aims to measure Jobs creation.
This is believed to a good indication about the health of the economy.
In past years (prior to 2017), these numbers would come out without any major volatility in the markets.
Nowadays, the 30-minute after the report is out pretty much determines the direction of the market for that Friday.
So far, my unofficial statistic is that the report tends to be more bullish and bearish.
I have witnessed massive swings and runs in Pre-Market in SPY and QQQ despite numbers being below estimates.
Below is the historical graph for your review and generate your own conclusions.
OTHER KEY DATES OF THE TRADING CALENDAR
The weekly petroleum report has an impact on oil related stocks and ETFS.
This report typically comes out on Wednesdays at 10:30 am Est or Thursday morning if there was a holiday earlier in that week.
One ETF in particular that is very suitable for Options Day trading around this report is XOP (SPDR S&P Oil & Gas Exploration Products).
It has been mostly range bound this year between $20 and $34.
The Implied volatility of its Options can sometimes spike up but in general, it is an excellent Day and swing trade candidate.
There is also the monthly retails numbers that may have an impact on big retail companies such Walmart ticker:#WMT), Target (ticker:#TGT), Macy s (ticker:#M) just to name a few.
To keep track of all economic Calendar events ( including not mentioned above), I strongly rely on the App version of Investing.com.
It can be downloaded from the App store, is free and track different markets (from US equities, to futures, commodities, currencies and even Crypto ) around the clock and around the world.
I also recommend to any trader to use the App by Teletrader to form Watch Lists by sector.
Here are a few examples of the ones I have gathered.
One great benefit of setting Watch Lists per industry is to get a gauge of sectors and industries rotation we described in Trading Stock Options: The Truth is out There.
That is a good one to perform a Top Down analysis in order to determine specific stock selection in a given industry where there is sudden flow or money and vice versa.
LEARN HOW TO TRADE STOCK OPTIONS ON EXPIRATION FRIDAY
As it is well-known Friday is expiration day for most weekly options.
Even the smallest volatility in the stock ( the underlying security) can spark some unusual gains on the derivatives i.e the associated options.
Well, I wanted to find out if there are patterns in the market that I could take advantage of around trading certain stock on Fridays.
The results of my lengthy study (from Jan 2016 up to date) were shocking.
Just for the small set of set I compile don my Watch List through the process described in this article, I discovered that a group of stocks which are more bullish than others on Fridays.
What does this mean and how can a trader take advantage of the conclusion of this research ?
HOW TO TRADE OPTIONS: FRIDAYS’ BULLS
From my Watch List of about 80 stocks or so, I downloaded historical data from Jason Strimpel’s Bulk Download tool dating back to January 2, 2016.
The bulk download tool is a great way retrieve historical data in a very short period of times.
I use it regularly for the IB Report ( more on this in an upcoming Tutorial) .
For this particular project, i downloaded the historical close and high prices for all my 80 Watch List stocks.
Then, I counted how many Fridays has the high of that Friday been greater than the closing price of the previous day (Thursday obviously unless it is a holiday) by at least 1.5%.
Why 1.5% ? Well, I have studied that a 1.5% move on most stock on a Friday generally generates over 50% gain in the calls options. This is just a rule of thumb.
Finally, I summarized the result on a yearly basis as shown below.
The table above shows the Top 30 stocks from just my Watch list of 80 stocks with the highest number of Friday each year since 2016 where the stock traded at least 1.5% above its closing price the previous day.
MY TOP 3 FRIDAYS BULLISH STOCKS TO DAY TRADE OPTIONS
The stocks with the check marks are the ones I prefer to trade on Fridays in general.
Among that list, here is my Top 3.
NUMBER 1 : MICRON (Ticker: MU)
For instance, Micron (Ticker:MU ) had 32 Fridays in 2016 , 22 Fridays in 2017, 23 Fridays in 2018
and 25 Fridays so far in 2019 (data was complied up to Nov 1 2019) where my condition was met.
So what is the big deal about this ?
I am glad you asked.
The year-to-date Probability metric in the last column of the table tells us that 57% of the Fridays have fulfilled the condition so far in 2019.
It is at or above 50% over the last 4 years !
Which means that one could have centered a bullish strategy (buy calls on Thursday) on Micron (ticker:MU).
NUMBER 2 : Freeport-McMoran Cooper & Gold Inc (Ticker: FCX)
Freeport-McMoran Copper & Gold Inc (Ticker: FCX) is another stock with great reliability remember this bullish strategy.
If you remember we shared in The Best Options Strategies how the Nov 1 10 Calls expiring on that Friday went 3 cents close of Thursday to over 55 cents on Friday expiration for over 1600% gains.
I mentioned that one of the entry criteria for me on Thursday was the recent bullish patterns on Fridays.
November 1, 2019 was the fourth consecutive Friday where the high was greater than 1.5% from the previous close.
It may have just been some recent bullish run ? Also, what is the average gain for all the Fridays when FCX has such a bullish behavior ?
Well let’s find out thanks to the detailed study summarized on the graph below.
We tracked the highs of all the Fridays so far in 2019.
We already know that FCX has recorded 23 Fridays out of 44 with a high greater than 1.5% from the previous day close.
The average High on Fridays for FCX is 2.5% above the previous day close.
This make FCX a high probability day or swing trade on Fridays.
Of course, on could also take a safer play by purchasing the next week expiration calls in case the bullish run on Friday is to carry on the next week.
Such options will be slightly more expensive.
On November 1, 2019, the High was just shy of 8% and we know that it yielded over 1600% gain on the closest Out of the money option.
May I point out that this is the fifth time in 2019 when such gains occurred ?
Jan 4, Jan 25, Oct 11 and Oct 25 are the other four instances. No bad at all for a tiny $10-$15 stock !!
NUMBER 3 : WORKDAY (Ticker: WDAY)
Any one of the stock with a check mark and consistent high numbers (highlighted in green) could have made is at this number three spot.
For instance, Qualcom (ticker:QCOM) has been very bullish in 2019 but just average in the previous three years.
This precluded me from picking it because this trend is new.
I did not pick up SNAP at this spot because its options carry a very high implied volatility and thus tend to be a bit too expensive.
Western Digital (Ticker: WDC) has tremendous regularity with 57% year-to-date probability of success but it trades in the same industry as Micron (MU) so these two can actually be traded as a pair.
In picking WDAY, I am selecting a third industry and also a higher priced stock.
One characteristic of high priced stocks (above $150 ) is that they do not require a big percentage variation to provide huge gains especially on the expiration day.
WDAY has an average of 1.7% over the 44 Fridays of 2019. That move is enough on expiration to provide close to 100% gains.
Below is this year summary of every single Friday high.
A very close look shows us that if we slightly modify the condition from greater than 1.5% to greater than 1%, WDAY would yield 25 Fridays in 2019.
This represents almost 57% probability which is quite good.
SUMMARY OF FRIDAYS BULLS STRATEGY
We derived a list of 30 stocks with the most bullish patterns on Fridays.
These can be traded through a day trade on Friday (the potential downside here is to miss some gains when the stock gap up ) or swing trade by buying the calls options on Thursdays.
Of course, the risk of the chosen stock gaping down is present in this second scenario.
Therefore, our recommendation when taking a swing trade is to purchase a hedge.
That hedge can be a smaller number of puts contracts.
For instance, if one is to buy x number of calls on WDAY, also purchase 0.5*x number of puts.
The strike for the calls is derived from the expected upward move.
The research is that the high is at least 1.5% above the closing price, consequently, the appropriate strike should not be higher than 1.5% of the closing price on Thursday.
I do like to have my expiration Friday positions in-the-money (meaning trading above my strike price) as soon as possible.
So, I tend to choose the strike price around 1% above the closing price.
This discussion on Fridays bull strategy may suggest that I have a bullish bias when trading.
That is not the case at all. I prefer to be wrong 100% of the time but as long as the trade I make are winners, I couldn’t care less about my views of the market.
The market does not care about what I think at all: I am not sure about you either unless you have a Jedi mind trick to submit the market to your will.
Where am I going with this ? Well, one could argue that how about the opposite side of this study ?
How about the bearish side of the stocks in my Watch List or any different Watch List for that matter ?
Do similar results exist so that we could benefit from them by trading Puts ?
HOW ABOUT FRIDAY BEARISH STRATEGY ?
We performed a similar analysis to the bullish strategy (greater than 1.5% from the Thursday close).
However, this time with lower than -1.5% from the Thursday close yielded the results below.
We need to wrap our mind that it is quite possible within the same Friday for a given stock to have a low below 1.5% from the previous day close.
And a high greater than 1.5% from the previous day close.
Hence, a stock like ESPR has 25 bullish Fridays and 26 bearish Fridays even though there are only 44 Fridays so far in 2019.
Our mindset in trading options should really be that the stock we are trading are moving.
Sideways actions are the enemies of options traders.
The analysis of the bearish table does not show consistent good numbers (green highlights) for our Top 30 bearish across the last 4 years.
Consequently, it is a viable consistent strategy to take into consideration.
For a handful of stocks, this information is valuable in setting up calls and puts on Thursdays for a worry free strangle overnight trade.
We took of a view of the different times when it is not wise to embark in guessing games.
We presented our Top tested best stocks for options trading on Expiration Friday.
On the other end of the spread, we showcased the proper way with the Fridays Bulls strategy How to Trade Stock Options with very little money.
I hope you found value in this discussion.
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.
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