Trading Options on Earnings requires Discipline and Patience.
In this series, we are going to show you the wrong way to trade options on earnings.
Then we will teach you through a series of examples the right way to go about trading options around earnings.
Trading Options On Earnings: What are Earnings ?
Earnings Reports take place quarterly for most US companies.
It is when each business informs the public and analysts of their results during the previous quarter.
These announcements generate movement (appreciation or depreciation) in the value of their stocks.
There are four time frames each year when the majority of Earnings take place.
Here are the four major Earnings Seasons:
- 1st Quarter Earnings: January 15th through February 15th
- 2nd Quarter Earnings: April 15th through May 15th
- 3rd Quarter Earnings: July 15th through August 15th
- 4th Quarter Earnings: October 15th through November 15th
It is important to note that there are businesses whose Earnings fall outside of these 4 windows.
Nonetheless, which the principles described below will still apply to me.
How To Find Your Edge During Earnings Season
One advantage about trading Options during the above Earnings seasons in the fact that hundreds of reports come on simultaneously.
This makes it difficult for market makers to manage volatility on all of these.
Why is this significant?
Because with the introduced volatility, you as a trader will take advantage of such volatility around the Earnings.
How to do so safely (with minimal Risk of your Capital) is what the next paragraphs will scrutinize.
How To Play Earnings With Options
Options trading on Earnings does not have to involve tossing a coin in the air and hoping that your stock is going in the direction of your trade.
There is a proven strategy we have developed that consist of not doing the above.
Rather, we wait until the Earnings results are announced and we trade according to the resulting momentum.
How can we be so certain that there still will be ample movement (volatility) after the Results are know ?
Successful Earnings Options Strategy
The Answer is the above quantitative Analysis we have performed for each stock 3 days after each Earnings.
We are able to statistically determine the percentage movement.
Does this mean we can tell the direction of the move after Earnings?
Not quite but the fact that there is still plenty of volatility on the Day after, the second and third day after earnings is sufficient for us not to gamble before the results are known.
The problem with the gamble is that even IF you are guessing the correct reaction of the market to the earnings report, market makers have you at the mercy through the Implied Volatility they control.
Here is our favorite example on video to showcase this concept.
An Expensive Alternative
If you must absolutely trade Options on Earnings, I would recommend buying a strangle (call and Put) 2 weeks before.
The idea is that typically, major stock (I can think of NFLX, AAPL, Roku) tend to have a pre-Earnings run or slump.
One of the legs of the strangle is bound to generate more that 100% gains in the 2 weeks leading to Earnings thus offsetting your loss on the losing leg.
You then will sell that winning leg a few hours just before the Earnings report is out.
However, this trade is risky and requires a great deal of capital.
One, because it has two legs.
Second, the two-week period makes it that the premium will be high most of the time.
The Best Way To trade Options around Earnings
Instead of guessing or risking a great deal of capital before, we prefer to wait post the earnings.
We use the previously mentioned Earnings Quant Analysis to select the stocks with the highest probability of movement on Day 1, 2 or 3 after their Earnings.
Here is a short video explaining how to fully take advantage of this research.
Trading Options on Day 1 Earnings Momentum
This is when the stock gap up or down significantly after the Earnings report is released.
I have actually analyzed this scenario through simulations and Live Trading to know that that gap momentum usually carries on the majority of the time.
Imagine a scenario where a stock gap up above 7%.
We would buy that stock for higher gains on that day.
You can apply that strategy on Day Trading Options on Day 1.
Based on the overall conditions of the market on that given Day, it is possible that the momentum my not hold the entire Day.
Thus, it creates opportunities for you to day trade options in the other direction.
We have showcased multiple examples of this technique in our Best Options Strategies articles.
Trading Options on Day 2 Post Earnings
This ought to be our favorite way to Trade Options during Earnings Seasons.
On Day 2 post Earnings, analysts issue upgrades and downgrades.
This creates extra volatility after the first day.
Great examples of stocks known for this are AMD, NVDA or MU not to always name Netflix 🙂
But today, I am bringing you a different one : Intel (Ticker: INTC)
Intel reported Earning After Market close on April 22, 2020.
On Day 1, very little movement was noticed.
Intel stock gaped down almost $3 from $59 to $56.2 on Friday.
The picture above captures the Apr24 57.5 Calls 1hour 15 min into the session.
Full details of the outcome of the trade are featured in the video below.
FINAL THOUGTS ON TRADING OPTIONS ON EARNINGS
We shared how we were able to use Quant analysis Research to beat IV Crush on Day 2 Post Earnings for the Intel Stock.
That trade safely generated profits with very little Risk.
This proves once again that Trading Options On Earnings does not have to be a gambling activity to satisfy the trader proverbial need for instant gratification.
TBP || Becoming A Successful Stocks and Options Trader