How to trade options during earnings season

How to Trade During Earnings Season. Earnings season can be a more difficult time to trade due to the potential volatility that may occur after and earnings announcement. While there are no hard and fast rules for how to trade during earnings season, there are a few general guidelines which can help you survive and thrive. Much depends on whether or not you own the stock that is releasing the earnings report. It is important to understand that stocks can fall on good earnings and rise on poor earnings. The market can be fickle at times. But remember the market is always right. Therefore, the key is to watch how the market reacts to the earnings report. How the market reacts will tell you what you need to know about how to establish or manage a stock position. Keep in mind that earnings may be announced before the open, during market hours, or after the close. Reports released before the open will often result in the stock being updown in premarket trading and throughout the day.

Earnings released after the close may see the stock move updown in after-hours trading and the next morning's session. Reports released during the market's normal trading hours can be highly volatile, especially in the stocks with lower average trading volume. The basic principle about earnings announcements is to pay close attention to how the market responds AFTER the earnings are announced. It is generally best not to buy a stock just before the announcement since this is a higher risk period. If you do want to trade the potential volatility, I think it's better to use options option prices are more reactive to volatility and offer lower capital risk. If you have a stock in your watchlist that is reporting earnings, you should already know the trigger price and the stop loss guidelines. You are prepared. In this case, buying the stock if it breaks out makes it like any other trade, except you must beware of the potential volatility. There may be a wide range bar that develops on high volume. Don't be in rush to chase price wide range bars tend to pull back to the 10 SMA or move sideways while the moving average catches up. If you already own a stock when earnings are announced, you will want to pay close attention to your stop loss order. You may get stopped out if there is high volatility, and it sometimes can't be avoided.

This will most often occur if there is a negative surprise to the earnings. If that's the case, you may want to be out of the stock anyway. If you give the stop loss extra room on earnings announcements, don't allow more than a -10% loss. You should always have a resting stop loss order in place. Pay careful attention to stock positions that do not have a profit cushion when earnings are announced. (A profit cushion means you have an unrealized gain in the position.) Positions without a profit cushion may lack significant profits because the BIGs have information about what the earnings are likely to be, and they may have been avoiding the stock, so it has not advanced. Be very careful about earning announcements when your stock has an unrealized loss. If you have a profit cushion, it makes things easier because you're not risking your capital, only your profits. Always pay attention to the price action leading up to the earnings announcement. There are generally clues to the strength or weakness of the stock which tells whether the BIGs are quietly making their way to the exits. Even &ldquosurprise&rdquo weak earnings is often telegraphed by the price action leading up to the announcement.

Many times the stock will gap up after a very favorable or surprisingly good earnings report. When this happens, trade it like a gap trade with special attention to the volume. Strong gaps have volume that is generally greater than 1.5 times the average volume (50-day). It's probably a good idea to let the price settle down during the first hour of trading to be more certain that the gap will hold. If the stock shows signs of weakness after the earnings are announced, you will want to avoid it. If heavy selling volume comes into the stock, it means the BIGs are selling off shares and may start to dump the stock. If you sell, and it ends up being a temporary selloff, then you will have the opportunity to reenter at a lower price. In summary, remember to study the price action leading up to the earnings announcement for clues. How the stock reacts to the announcement is the most important thing, not necessarily how good or bad the report is perceived to be. Only buy stocks from your watchlist since these stocks have been researched already. Always know when earnings are going to be announced on a stock you already own, and make sure your risk is managed. Trading Option Straddles During Earnings Releases. Option investors have a unique ability to profit in the market no matter which direction a stock’s price moves. A straddle is a great example of this kind of method.

A straddle is market neutral which means that it will work equally well in bear or bull markets. These trades have an extremely low probability of maximum loss and can earn big returns if a stock’s price moves a lot. VIDEO Trading Option Straddles During Earnings Releases. Sometimes stocks move a lot very unexpectedly and other times we can predict this volatility. One of these predictable periods of volatility immediately follows earnings announcements. These happen every quarter and the news can affect a stock’s price dramatically. In today’s video we will use a specific case study for using an option straddle the day before the earnings release for Google. In order for a straddle to be successful, a stock’s price needs to make a big move up or down. The “straddle” means that you are buying two options, a call and a put, with the same strike prices. Imagine that you are “straddling” both halves of the option chain sheet. A straddle is most frequently entered with the at the money strike prices. In the example for GOOG the stock is currently priced at $390 per share and the 390 strike price calls and puts cost a combined total of $45 per share or $4,500 total to purchase.

If we imagined holding the straddle through to expiration the stock would have to move at least $45 one direction or the other to reach break-even. Although this article is about short-term straddles, sometimes buying a straddle with a long expiration date can be an effective method. You can learn more about long term option straddles here. This may sound a bit unusual to buy both a call and a put at the same time. New traders often assume that gains from one of the options will be offset by losses in the other. That is true to a point, however, eventually the losses from the losing option will be outpaced by the gains from the winning option. For example, imagine that the stock breaks out to the upside the call will begin gaining in value while the put loses value. As long as the call gains more than the put, the straddle will be profitable. That is also true in reverse if the stock begins to lose value. Because both options are long they can only lose what was originally invested while the winning side still retains the possibility of unlimited profits. Because such a large move is needed to become profitable, it is more likely that the trade will conclude with a small loss. However, because the upside potential for long options is theoretically unlimited a straddle trader is counting on the much larger wins to offset the more frequent losers. VIDEO Trading Option Straddles During Earnings Releases, Part 2. Trading straddles during an earnings announcement ensures a high likelihood for volatility and inflated option prices. These are the offsetting opportunities and risks of the earnings straddle.

If the stock moves a lot the straddle will likely profit, however, if the stock doesn’t move enough the deflation in option prices following the announcement will create a loss. These offsetting risks and opportunities are not surprising and most short term straddle traders anticipate more losing trades than winning ones. Long term profitability rests on those outlier earnings releases in which the stock moves dramatically and large profits can be accumulated. In the case study from the last article we illustrated a straddle on GOOG that cost $45 per share or $4,500 total. If we assume that the position was held until expiration that means that the stock would have to move at least $45 per share up or down to reach break even. Calculating the expiration break even is a reasonable way to estimate how far the stock needs to move to compensate for the deflation in the option prices following an earnings announcement. In this case, the stock did not move far enough to make the trade profitable and any potential straddle traders are now faced with two alternatives for exiting the position. 1. Selling to exit the straddle immediately. Option prices have declined the day after the earnings announcement and currently the 390 calls are worth $13.30 per share and the 390 puts are worth $20 per share. The total value of the straddle is $33.30 per share or $3,330 dollars per straddle.

Because this is an actively traded stock there should be no problems selling to exit the straddle and move on to a new opportunity. 2. Leaving one leg of the straddle open for speculation. Prices for this stock have moved to the downside and if your analysis indicates that there is more opportunity within the new downtrend over the next few weeks you may choose to leave the long put on while the call is exited. There is no obligation for the straddle buyer to have to exit both sides at one time. You may choose to “leg out” of the spread by selling one side first anticipating that the other side will improve in value before expiration. Options provide alternatives that can be used as market events unfold. A long straddle is a good example of how a spread can be modified and converted from a market neutral position into an outright long position that can continue to profit if the market continues to trend. It is important to note that this is merely one use for the straddle trading method. You can learn more about trading straddles over the long term here. Additionally, more risk tolerant traders may flip the traditional long straddle into a short position that will profit from the deflation in option prices following big announcements. You can learn more about short straddles here. This article is produced by Learning Markets, LLC. The materials presented are being provided to you for educational purposes only.

The content was created and is being presented by employees or representatives of Learning Markets, LLC. The information presented or discussed is not a recommendation or an offer of, or solicitation of an offer by Learning Markets or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment method. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment method should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives. Learning Markets and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment method. Any specific securities, or types of securities, used as examples are for demonstration purposes only. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds’ performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing. Investors should consider the investment objectives, risks, charges, and expenses of mutual fund carefully before investing.

Mutual funds are subject to market fluctuation including the potential for loss of principal. A prospectus contains this and other information about the fund and is available from the issuer. The prospectus should be read carefully before investing. Options involve risk and are not suitable for all investors. Detailed information on the risks associated with options can be found by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by calling the Options Clearing Corporation at 1-888-OPTIONS. A trader’s guide to earnings. The potential for a stock to move in response to an earnings report can create active trading opportunities. Trading Options Stocks. Trading Options Stocks. Trading Options Stocks. Trading Options Stocks.

On January 9, 2017, the 2016 fourth quarter earnings season unofficially kicked off. Earnings season, which usually lasts a few weeks each quarter, is a period of time when a majority of public U. S. corporations release earnings reports. There is not much else that impacts stocks like when a company reports earnings. Because of the potential for relatively big price swings, investor returns can be heavily influenced by how a company’s earnings report is received by the market. It is not unusual for the price of a stock to rise or decline significantly immediately after an earnings report. This potential for a stock to move by a large amount in a certain direction in response to an earnings report can create active trading opportunities. Here's how you might consider incorporating earnings season into your method. Before considering how you might trade a stock around an earnings announcement, you need to determine what direction you think the stock could go. This forecast is crucial because it will help you narrow down which strategies to choose. There are strategies for price moves to the upside, downside, and even if you believe the stock won’t move much at all. Whether you are considering trading an earnings announcement, or you have an existing open position in a stock of a company that is about to report earnings, you should consider actively monitoring company-related news before (and after) the release, in addition to the results of the report itself. An earnings announcement, and the market's reaction, can reveal a lot about the underlying fundamentals of a company, with the potential to change the expectation for how the stock may perform.

Moreover, the earnings impact upon a stock is not limited to just the issuing company. In fact, the earnings of similar or related companies frequently have a spillover impact. For example, if you own a stock in the materials sector, Alcoa Inc’s ( AA ) earnings report is of particular importance because it is one of the largest companies in that sector, and the trends that influence Alcoa tend to impact similar businesses. As a result of any new information that might be revealed in an earnings report, sector rotation and other trading strategies may need to be reassessed. Additionally, Alcoa’s earnings have a unique significance because its release marks the unofficial beginning of earnings season. If you are looking to open a position to trade an earnings announcement, the simplest way is by buying or shorting the stock. If you believe a company will post strong earnings and expect the stock to rise after the announcement, you could purchase the stock beforehand. 1 Conversely, if you believe a company will post disappointing earnings and expect the stock to decline after the announcement, you could short the stock. It is very important to understand that shorting involves significant risk. Only experienced investors who fully understand the risks should consider shorting.

Similarly, call and put options can be purchased to replicate long and short positions, respectively. An investor can purchase call options before the earnings announcement if the expectation is that there will be a positive price move after the earnings report. Alternatively, an investor can purchase put options before the earnings announcement if the expectation is that there will be a negative price move after the earnings report. Trading options involves more risk than buying and selling stock, and only experienced, knowledgeable investors should consider using options to trade an earnings report. Traders should fully understand moneyness (the relationship between the strike price of an option and the price of the underlying asset), time decay, volatility, and options greeks in considering when and which options to purchase before an earnings announcement. Volatility is a crucial concept to understand when trading options. The chart below shows 30-day historical volatility (HV) versus implied volatility (IV) going into an earnings announcement for a particular stock. Historic volatility is the actual volatility experienced by a security. Implied volatility can be viewed as the market's expectation for future volatility. The earnings period for July, October, and January is circled. Consider the greeks and implied volatility when trading options going into an earnings release. Notice in the period going into earnings there was a historical increase of approximately 14% in the IV, and once earnings are released, the IV has returned to approximately the 30-day HV. This is intended to show that volatility can have a major impact on the price of the options being traded and, ultimately, your profit or loss.

Advanced options strategies. A trader can also use options to hedge, or reduce exposure to, existing positions before an earnings announcement. For instance, if a trader is in a short-term long stock position (e. g., you own the stock and have a short-term outlook), and expects the stock to be volatile to the downside immediately after an upcoming earnings announcement, the investor could purchase a put option to offset some of the expected volatility. This is because if the stock were to decline in value, the put option would likely increase in value. In addition to buying and selling basic call and put options, there are a number of advanced options strategies that can be implemented to create various positions before an earnings announcement. Some multi-leg, advanced strategies that can be constructed to trade earnings include: Straddles — A straddle can be used if a trader thinks there will be a big move in the price of the stock, but is not sure which direction it will go. With a long straddle, you buy both a call and a put option for the same underlying stock, with the same strike price and expiration date. If the underlying stock makes a significant move in either direction before the expiration date, you can make a profit. However, if the stock is flat, you may lose all or part of the initial investment. This options method can be particularly useful during an earnings announcement when a stock’s volatility tends to be higher. However, options prices whose expiration is after the earnings announcement may be more expensive. Strangles — Similar to a long straddle, a long strangle is an options method that enables a trader to profit if there is a big price move for the underlying stock. The primary difference between a strangle and a straddle is that a straddle will typically have the same call and put exercise price, whereas a strangle will have two close, but different, exercise prices. Spreads — A spread is a method that can be used to profit from volatility in an underlying stock. Different types of spreads include the bull call, bear call, bull put, and bear put.

Collar — A collar is designed to limit losses and protect gains. It is constructed by selling a call and buying a put on a stock that is already owned. Finding opportunities. Information about when companies are going to report their earnings is readily available to the public. More in-depth research is required to form an opinion about how those earnings will be perceived by the market. Of course, traders can be exposed to significant risks if they are wrong about their expectations. The risk of a larger-than-normal loss is significant because of the potential for large price swings after an earnings announcement. A company’s earnings report is a crucial time of year for investors. Expectations can change or be confirmed, and the market may react in various ways. If you are looking to trade earnings, do your research and know what tools are at your disposal. Research stocks. Find options contracts. Test single - and multi-leg option strategies with Fidelity’s method Evaluator (login required). This options method can potentially generate income on stocks you own.

Here are the pros and cons of trading when the market is officially closed. This advanced options method is designed to limit losses and protect gains. Consider these tips and resources to help you trade options. How to Trade During Earnings Season. Looking at my real time trading screen right now, the four stocks I'm evaluating are up 6.3 percent, 5.95 percent, 5.48 percent, and 0.38 percent. Each of these stocks has swung 10 percent or more over the last three trading days, and two have swung more than 20 percent. The action in these four stocks is typical of small caps during earnings season. In fact, two of these companies report this afternoon, one reported Friday, and the other last Wednesday. Let's put this price action into perspective: a 10 percent gain in the S&P 500 on an annual basis is considered a pretty good year. That broad market proxy has actually averaged less than 10 percent a year since inception in 1979. Yet these stocks are moving ten percent or more in just a couple of trading days. That's why investors are attracted to small cap stocks - the returns on these tiny companies just can't be beat .

But the risks are a lot higher, especially during earnings season when small caps can act like a squirrel fleeing a Maine coon cat. Some advisors will say to stay away from the market during earnings season. They'll say that the risks are too high to place any trades. These advisors are doing you a disservice. They are trying to cover their behinds. Like most analysts, speculation isn't their strong suit. They don't want to take the risk of saying a stock is likely to report expectation-beating results, only to be wrong. Unfortunately for them, and for you if you listen to their garbage, this means they'll never be right. You can't make much money if you never take any risk. You won't ever smile inwardly as the stock you bought before earnings soars 10 percent, 20 percent, or even more. But you won't ever have your jaw hit your keyboard when your company reports dissapointing news, and the stock plummets 15 percent.

If you can't handle these emotions, stop reading this article now. The rest of today's message isn't for you. And there's nothing wrong with that. Everyone has a different risk tolerance, and handles making, and losing, money in a different way. Today's message is for investors who want to buy just ahead and just after earnings because they know that this event is a major catalyst for companies. This is when their growth can be confirmed, and future upside becomes more certain. There are a couple of suggestions I'll offer for investors who want to use earnings reports to their advantage. ***First, and this one should be obvious, do your research. Any gunslinger with a trading account can buy a stock that is trading higher into earnings because they think other investors know something they don't - or something that they want to believe. If you follow this poor example, you will lose money. You need to know where a stock should be trading based on your analysis of known information, and your assumptions of unknown information. Armed with these two weapons you'll actaully be making an informed decision, and you'll know if you're getting a good value on your investment. ***Second, based on how sure you are of your analysis, buy a percentage of the total number of shares you want to own.

If you're convinced you've uncovered something the market is totally missing, go all in. If you're 50 percent sure in your analysis, then take half a position. You can add to these positions after earnings depending on how right you were. ***Third, let the potential opportunity guide the dollar amount you invest. If the potential upside or downside is five to ten percent, a larger investment may be suitable because of lower risk. But if the potential move is 20 percent or more, a smaller dollar amount invested is wise. ***Fourth, remember that you care where a stock is going, not where it's been. This is where your analysis comes in again. Just because a stock has risen 100 percent in the year before you uncoverd it doesn't mean it can't rise hundreds of percentage points more in subsequent years. ***Finally, don't buy every stock you want to ahead of earnings. Try one or two, and watch the others you've considered. You'll learn more, and have more fun. Both will help you increase your odds of investing success . There is a lot more to say on the subject of buying small cap stocks during earnings season, but the above hits on the major points. Just remember not to get sucked into the excitement.

The market doesn't know that you own the stock, and it doesn't care. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc. How to trade options during earnings season Options Opportunities with Earnings Volatility. This is Part I of a two part educational series on trading options using WhisperNumber's Whisper Reactor data and services. A Whisper Reactor is a company that is most likely to see a positive price reaction when they beat the whisper number, and see a negative price reaction when they miss the whisper number. The 'whisper reactor' companies, and expected price movement following earnings release, are available to subscribers of the Whisper Reactors service. OPTIONS FOR EARNINGS EVENTS. investors and traders. with lower risk" Scenario #1: XYZ reports +13-cents on Oct. 24th beating the whisper number by 2-cents.

The stock soars in 5 days to $71, and our call is trading for $5.00. If we are able to sell the call for $5.00, we have doubled our money. We might want to take our profits here if we can because the stock has already exceeded the average expected move in only 5 days (+9.2% actual vs. 4.2% expected in 10 days). Scenario #1: We buy 2 Nov $55 put contracts for $1 each, for a total investment of $200 (excluding commissions). XYZ drifts lower to $61 before the October 24th earnings release and the 55 puts are trading for $1.50. An investor could take profit here on the options with a 50% gain. But, let's look at what could happen if she stays in the trade through the earnings event. If XYZ reports +8-cents (vs. the whisper number of +11-cents), the stock could quickly achieve a drop similar in size to its "10-day Reactor" expectation of -9.3%. Assume the stock drops to $56 within 2 days of reporting. With just over 3 weeks left until expiration, the $55 strike puts might be trading for as much as $2 or $3 depending on volatility. Even though the options have not gone "in-the-money," they have gained significant value because of the possibility that they might before expiration. An investor could take profit on these options, and realize up to a 300% gain per contract. Kevin Cook was an institutional foreign exchange market maker for 9 years before signing on with the Optionshouse Options News Network as an options instructor and market analyst. He studied philosophy in college and wanted to teach, but ended up on the floor of a commodity exchange where he learned trading and derivatives from the ground up. The new Firefox.

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Please follow these instructions to install Firefox. Simple method reaps massive profits on earnings. It's been a great earnings season for options traders. div > div. group > p:first-child"> A few weeks ago, Goldman Sachs' options research team looked at the historical returns that would have been yielded by a method of buying at-the-money call options on stocks five days before their earnings, and selling them the day after. Since a call represents the right to buy a stock for a certain price within a given time, this is a bullish method that would tend to profit as a stock rises. And since the average stock rises on earnings, those call options tend to pay off, Goldman found. Generally, the method has yielded a profit of 14 percent, and 16 percent when it comes to stocks with liquid options. But as it happens, the first 38 companies with liquid options that have reported earnings have shown call buyers a return of 48 percent, tracking for one of the best years in Goldman's study going back to 1996. Contributing to the bonanza for options traders have been names like Phillip Morris and Netflix, which would have shown call buyers profits of 793 percent and 538 percent, respectively. More recently (and outside the timeframe of the Goldman note), the 380-strike call on Amazon expiring in May was trading for about $17 on April 17. On Friday, Amazon shares rose 14 percent on earnings, and as of the close, that same call was worth $66.15. That's a 290 percent profit in a week.

Of course, not every name soars on earnings. But Goldman's point is that because investors tend to be skittish and expectations tend to be overly bearish, stocks rise off of earnings more often than they fall, and the values of call options rise along with them. However, buying calls outright ahead of earnings may not be the best method, some traders warn. "While the vast majority of positions that we have put on ahead of earnings have been bullish positions, we rarely trade them using outright long calls," commented Andrew Keene, an options trader with Keen on the Market. "The uncertainty surrounding an earnings release creates a huge bid for implied volatility ahead of the release. Once the earnings come out, volatility drops, and this can hurt long options positions." To reduce the effect of falling options prices on his positions' values, Keene chooses to use "spread" trades, whereby he sells options at the same time he buys them. That reduces his exposure to the overall prices of options ahead of a highly anticipated event. However, the downside of doing a spread is that one often only captures part of a massive move, rather than getting the unlimited upside. CORRECTION: This version corrected the percentage of profit in the Amazon options trade to 290 percent. Power Profit Trades. Tom Gentile's twice weekly free newsletter Power Profit Trades. Click here for this special report.

Navigate. The Best Option method for Earnings Season Profits. Earlier this week, I told you that traders are always looking to “be on the right side of the trade.” To an options trader, this means you want to be long calls on a stock that is going up in price or long puts when a stock is going down in price. That’s often easier said than done – take earnings season. Options premiums can fluctuate significantly going into an earnings announcement… and things can really get wild when the announcement is made and the stock price moves on the news. The challenge, of course, is figuring out how to end up on the right side of the trade. If the company’s report comes in and is favorable, the stock will usually gap up and open higher than it closed the day before. If you had long call options, then you were on the right side of the trade. If earnings come in below expectations, the stock will usually gap down and open lower than the previous day’s close. In this case, long put options would put you on the right side of the trade. That said, it can be quite difficult to judge which way a stock will move on an earnings announcement (these gaps can be pretty significant – ask anyone who has seen what The Priceline Group Inc. (NASDAQ:PCLN) or Alphabet Inc. (NASDAQ:GOOG) has done the day after their earnings announcements.

While good news usually brings a pop and bad news usually signals a decline in the price of the underlying, that’s not always the case in today’s markets. But what if I told you that can trade during earnings season without having to guess which way a stock will move? There’s one method that can help you profit no matter what happens during earnings season. Let me show you… Challenge #1: Calls or Puts? Here are four scenarios that can – and do – play out following an earnings announcements: The company beat earnings expectations, but lowered their forecast for salesearnings in the upcoming quarters, and instead of gapping up, the stock instead gaps down and or continues to decline in price. The company missed earnings expectations, but they reported higher than expected growth in upcoming quarters and the stock gaps up andor continues to trade higher. The company beat earnings from last quarter, but not by this quarters “expected” amount. The beat looks like they are doing better than last quarter, but since it wasn’t ‘good enough’ the stock trades down. The company missed earnings from last quarter, but didn’t miss by as much as this quarters “expected” amount. They still have negative earnings, but they are deemed to be doing better than expected by not losing as much, so things are deemed moving in the right direction and the stock trades higher. All of these scenarios – where good news is seen as bad and bad news is seen as good – can make trading options – buying the “right” options – a frustrating experience for traders. The best way to avoid the frustration of guessing which way a stock is going to move on an earnings announcement is to employ one of my favorite strategies: the straddle. With a straddle you do not have the pressure of having to pick which option you have to buy in order to make money. If you buy calls only, the stock has to go higher if you buy puts only the stock has to go lower.

But a straddle allows traders to potentially benefit whether the stock goes higher or lower. A straddle allows you to take a number of variables out of the equation, questions like: will the company beat, miss, raise guidance, announce a stock buyback program, forecast better or worse results in ensuing quarters… the list goes on. Any of those can happen – and with a straddle, you don’t care because you are now in position to potentially benefit. A straddle is an option trade position where you buy-to-open BOTH a call and a put option on the same stock with the same strike price and the same month’s expiration. You are incurring more cost by buying both options, so you need the underlying to make a significant move. And by significant I mean the underlying should have the possibility to a big enough price move to cover the cost of the trade. For more on this great non-directional trading method, click here. Challenge #2: When to Close Down Your Straddle. Once you’ve decided to use the straddle, the question becomes: do you close out your trade prior to the earnings announcement or hold it until after the announcement? Before we get to that, let me briefly discuss the concern about Implied Volatility (IV) around earnings. IV tends to increase going into an earnings report as the speculation of what the report will mean to the stock price going forward increases.

Buyers of options, even the straddle trader, have to be careful and know they are buying higher IV in their options prices during the period before an earnings announcement. It becomes a situation where one is likely to be buying at a high IV to sell at an even higher IV. Take a look at the image below, which depicts what can happen to IV going into earnings: The below image shows a spike in IV in the options of a company coming up on their earnings: The risk in buying ahead of the earnings announcement is the fact the IV is likely to be higher. Once the announcement is made and the news is out, there is no more speculation, and IV heads lower. Implied volatility comes out of the options pricing, and despite what happens with the price of the stock, “IV crush” can affect the option value negatively. This shows what happens to IV when people “buy the rumor, sell the news.” Closing before the announcement – The biggest consideration in closing down your straddle before an earnings announcement is that you risk the stock actually gapping or moving enough on good or bad news, and you miss out on those profits if you would have if you held over the announcement. That is the risk of opportunity lost. Closing the day after the announcement – This becomes a situation where you may have profit in the trade as the stock has run up and implied volatility is increasing, which pumps up the premium, increasing the call option side of the straddle. The risk here is that, following the announcement, any of the four scenarios I mentioned earlier can happen – and wreak havoc on your options. The stock might gap in the opposite direction, bringing the options value back to where you started. Even though a breakeven situation is better than a loss, having the stock come back to where it was when you put on the trade is frustrating.

In addition to the depreciation in implied volatility, a loss of time value may adversely affect the option if the intrinsic value isn’t offsetting that and maintaining or gaining profitability. The primary thing that can hurt you in a straddle position is if the stock trades sideways or doesn’t move enough to cover the cost of the trade. When the stock is not gaining any more intrinsic value, the other conditions just mentioned – “IV crush” and Theta or Time decay – can kill the value on that option. If you’re trading options during earnings season, it’s best to know the historical price moves of the underlying before and after earnings announcements. With my proprietary tools, I can show you the historical behavior of stocks around earnings announcements, including how IV impacts a stock’s price in both the run up to the announcement and the aftermath. This is how I pinpoint stocks with the chance to make the biggest price moves (in either direction), and how I know when to close down my straddles. The following screenshot shows the price % move after the earnings on a list of stocks: Click to View This next list shows the best price % move prior to earnings: Click to View Finally, you can even analyze what IV does prior to and after the earnings announcement. The image below shows you what happens to IV after the earnings announcement: Click to View Knowing how the underlying stock has behaved during past earnings announcements can give you a better chance at profitably closing out your straddle. Here’s Your Trading Lesson Summary: Using the Straddle to Trade Earnings. The best way to trade options during earnings season is to use my favorite non-directional trading method: the straddle. The straddle allows you to profit whether the stock moves up or down on the announcement, so long as it moves enough to cover the cost of the trade. Some considerations: Once you don’t have to guess the direction of the price move of the underlying, the question becomes: do you close down your straddle before or after the earnings announcement? There are risks to closing out early (missing profits from the announcement itself) or holding your trade too long (IV crush or time decay bringing down the price of your options).

The best thing to do is know your history – research how the underlying stock has behaved during past earnings announcements, and trade accordingly. 2 Responses to “The Best Option method for Earnings Season Profits” I’ve read your lessons enough to understand how and why IV Crush happens. However, you’ve never suggested any method to profit from it. How can a trader capture profit from IV rushing out of the premium without subjecting ones self to unlimited risk? the other straddle play i like is buy a few more options on the way u think it will go , letting the other side of the straddle to just prevent a loss on the whole straddle. Strategies For Quarterly Earnings Season. For better or for worse, companies are judged by their ability to beat market expectations. All eyes are on whether companies "hit their numbers" - in other words, whether they manage to match Wall Street analysts' consensus estimates. Knowing the importance of those estimates can help investors manage through quarterly earnings results. Read on to learn some tips for survival. Watch Those Estimates. A company's ability to hit earnings estimates is important to the price of your stocks.

If a company exceeds expectations, it's usually rewarded with a jump in its share price . If a company falls short of expectations - or even if it just meets expectations - the stock price can take a beating. Beating earnings estimates says something about a stock's general well-being. A company that routinely exceeds expectations quarter-after-quarter is probably doing something right. Consider Cisco Systems' performance in the 1990s. For 43 quarters in a row, the internet equipment player beat Wall Street's hungry expectations for higher earnings. All the while, its share price saw a huge increase between 1990 and 2000. As a general rule, companies with earnings that are predictable are easier to assess and are often better investments. (For more reading, see Earnings Forecasts: A Primer , Surprising Earnings Results and Earnings Guidance: The Good, The Bad And Good Riddance? ) Conversely, a company that consistently falls short of estimates for several consecutive quarters likely has problems. For instance, look at Lucent Technologies. Through 2000-2001, the technology giant repeatedly missed earnings estimates, in many cases by wide margins.

It turned out that Lucent was unable to cope with shrinking sales, rising inventories, bloated cash outlays and other woes that sent its share value plunging from $80 to 75 cents in two years. As this example suggests, disappointing earnings news is often followed by more earnings disappointments. Don't Rest Easy with Estimates. Just because a company misses estimates doesn't mean it can't have great growth prospects. By the same token, a company that exceeds expectations could still face growth difficulties. Consensus estimates are basically the sum of all available estimates divided by the number of estimates. So when you read in the financial press that a company is expected to earn 4 cents per share, that number is simply the average taken from a range of individual forecasts. Two different analysts might see the company earning 2 cents per share and 6 cents per share, respectively. The truth is that earnings are awfully difficult to predict. Brokerage house earnings estimates, in some cases, may be little more than educated guesses. After all, companies themselves often are unable to forecast their future accurately. Why should Wall Street observers be any more well-informed?

Before getting too excited when a company does manage to meet or beat the expectations, keep in mind that companies take great pains to ensure their numbers are on target. What investors often forget is that companies sometimes "manage" earnings to hit analysts' numbers. (To read more, see Detecting Two Tricks Of The Trade and Cooking The Books 101 .) For instance, a company might try to boost earnings by recording revenue in the current quarter while delaying recognition of the associated costs to a future quarter. Or it might meet quarterly estimates by selling products at a lower price at the end of the quarter. The trouble is that managed earnings of this kind do not necessarily reflect real performance trends. Investors should try and spot these kinds of tricks when assessing how quarterly numbers match up with estimates. Beyond the Consensus. Remember, the consensus estimate is basically an aggregation of individual forecasts. It may not capture what the best analysts think about a company's prospects. A few analysts tend to make remarkably accurate earnings forecasts others can miss them by a mile. Therefore, it's wise for investors to find out which analysts have the best track record and use their forecasts instead of the consensus. When there is a lot of disagreement among analysts, the forecasts on a company will be spread widely around the mean consensus estimate. In such cases, a stock could be a bargain based on the most optimistic estimate, but not on the consensus number.

Investors can profit if the analyst with the higher-than-average estimate turns out to be on target. Keeping in mind the limited accuracy of the consensus, share value swings that accompany earnings that beat or miss estimates may be unwarranted. In fact, a drop in the stock price that results from numbers coming up short may create a buying opportunity. Likewise, better-than-expected results aren't necessarily good news either and can offer a good chance to take profits. Options Trading During Earnings Season. By Explosive Options , Did you see the reaction post earnings from Google? How about Facebook? Or even Apple? Yes, these names moved significantly but it is what the market did that was more interesting. Google was blasted the following day but the market was up. After Apple reported a better than expected quarter (stock was up a huge 5%) the market hung around the flat line. And then there is Facebook, which smashed estimates and vaulted 27% the day after, yet the market was looking to get creamed the next day. How about Expedia this past Friday? Hammered post earnings, yet the market squeaked out a win. So why am I telling you this?

Because stocks react on their own ‘news’ and merits, as they should without any macro or market influence. This is generally the result of a market with little correlation, a market of stocks is a great stock picking environment. If the charts and technicals are in alignment with my thesis it allows me to use my skills to game a good probability trade. Should IBM be punished after a stellar earnings report if news from Japan is creating market volatility? What if Coke misses on numbers but the market is paranoid about risky equity securities and wants safety – and Coke shoots higher. As an options trader I have to thread the needle to make gains without the influence of noise, and since time is of the essence I cannot afford to wait for that influence to subside. The clock is always ticking on option plays. So, with a market now less worried about exogenous events occurring (VIX down under 13% and has been trending lower) there seems to be quite a bid under stocks. That won’t last forever, but for now I will take advantage and trade what the market will give me – an opportunity to pick stocks.