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Options Trading Strategies For Earnings Season


Certain options trading strategies are optimal for trading during earnings season. – PowerPoint PPT presentation

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Title: Options Trading Strategies For Earnings Season


Options Trading Strategies For Earnings Season
Welcome to Options Trading Research Your premier
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Options Trading. For more info on Options Trading
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  • Hi, My name is Steve and Im with Options Trading
    Research, today were reviewing our recently
    published article

  • Options Trading Strategies For Earnings Season

  • Earnings season is once again upon us, creating
    opportunities for both large gains and large
    losses. As a rule of thumb, individual stocks
    tend to react more significantly during earnings
    periods than other times of the year.

  • The problem is figuring out which way a stock is
    going to move. In other words, how are investors
    going to react to good or bad earnings results?

  • As always, picking a short-term direction of a
    stock is can be extremely challenging. Youre
    never quite sure whats going to happen after a
    earnings release until it actually happens. Will
    investors shrug off a bit of bad news?

  • Will they find a ray of sunlight in an otherwise
    negative report? Is good news good enough?
    Thats why it tends to be easier to decide
    whether a stock is going to move in general,
    rather than pick a direction.

  • Let me explain With options, its a piece of
    cake to bet on a stocks movement and you dont
    have to guess what direction the move is going to

  • Conversely, you could bet on lack of movement
    using options, although this tends to be a
    riskier proposition.

  • Okay, so what options trading strategies are good
    for trading earnings?

  • Before I get into the strategies themselves,
    lets look at an example of a stock that tends to
    move quite a bit on earnings days.
  • Heres Amazon (AMZN)

(No Transcript)
  • AMZN is known throughout the industry as a big
    mover on earnings days. You can see on the
    chart, once a quarter, theres a big spike in the
    price causing a stair-like pattern to emerge.

  • Now, AMZN has had a very good year for earnings
    results, but in the past those moves were
    sometimes large down moves.

  • The key here is that the share price definitely
    moves after earnings come out. So the question
    is, how can we capitalize off this knowledge?

  • Thats were options come in.

  • There are two primary options strategies to use
    when trading during earnings season at least if
    your goal is trade movement (or lack thereof).

  • These two strategies are the straddle and the
    strangle. Follow the links for more info on each
    strategy. In a nutshell, a straddle is when you
    buy a call and a put at the same strike, in the
    same expiration month, usually at-the-money.

  • So for AMZN, It could be something like buying
    the November 525 call and 525 put at the same
    time. In this case your trade makes money if AMZN
    moves quite a bit higher or lower than 525 by
    November expiration.

  • Keep in mind, by using November, the strategy
    takes into account earnings. However, this type
    of strategy on a high priced stock like AMZN is
    going to be very expensive.

  • The stock will have to move over 60 at current
    prices for this trade to payoff. Thats where the
    strangle comes in.

  • A strangle is the same as a straddle, except you
    buy out-of-the-money calls and puts instead of
    at-the-money. Buy purchasing OTM options, the
    cost of the spread is going to be less.

  • For example, the AMZN 500-550 strangle (buying
    the 500 put and the 550 call) may cost about 40
    instead of 60. However, the stock has move
    farther in each direction to make money.

  • In other words, the strangle is cheaper, but the
    upside is less than the straddle. On the other
    hand, you could sell a straddle or strangle if
    you think AMZN isnt going to react to earnings
    as much as it normally does.

  • Clearly, youd be collecting very juicy premiums
    in order to do so. However, your risk is
    essentially unlimited in this case and you have
    to have a big margin account to make these types
    of trades.

  • These are considered more advanced strategies
    than the buy-side counterparts. Both straddles
    and strangles can be quite useful for earnings
    season. The key is to not pay too much.

  • I like use straddles on cheaper stocks, with more
    affordable premiums. If you want to play the big
    moving, higher priced names, use strangles
    instead just dont buy too far out of the money.

  • Used properly, straddles and strangles can result
    in substantial profits during earnings seasons.
    As always, the primary factor is doing your
    research and finding the best mix of risk versus
    return before making a trade.

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