a follow up
Last week, we discussed earnings season — and some of the opportunities it can provide.
One of my favorites is the 2x move. This is when a company shocks on earnings, to the upside, and the stock moves more than twice what the market maker move was. Often times, this sets up a momentum move — that can be traded for either a day trade, or a swing trade lasting a few days, in the options market.
There are a couple reasons I like this trade (and why it might fit in well with what you’re doing).
Here they are…
- Since the earnings report has already occured, the implied volatility in the options gets crushed. This means the options are now far cheaper than they were before the event. This is especially true for options expiring within a few days, in the current weeks options series. You can often find very cheap options to buy, for this trade, for this reason.
- It can lead to a quick, powerful move. This isn’t a trade that you sit around, waiting for 2-3 weeks to see if it works. It’ll either work, within 15 minutes or so, and if not, definitely by the next day — or it won’t work at all. The momentum is either continuous or it isn’t. The key is identifying moments in time where the momentum will likely continue.
- Of course, the entire point of a powerful, quick move, is to make money. These trades are aggressive day trades. However, when you pick the right ones, it can lead to a very happy market open. In the options market, your entire goal should be identifying greater than expected moves. That’s how you make money when buying options. This is one of those times.
How do you identify a 2x move?
I start the search for these either directly after market close (when earnings reports begin coming out) or before market open. You can also of course, identify big movers after the market opens in the morning.
I’ve had varying methods over the years.
But using watchlists that include companies reporting that day works, as does using a scan that is looking for a move over 2% after hours (and then you can narrow it down from there.) I also look for these moves beforehand, if I know they have a tendency of doing this on earnings, or if they have high short interest.
The high short interest tickers are the absolute best, because not only do they have momentum behind them, but they also have shorts screaming for cover. This can lead to an even bigger move (like TSLA last week, or AMD on a regular basis).
Since we last spoke, there’ve been two key 2x movers: LRCX and TSLA.
LRCX is one of my favorite Phoenix stocks, and I always look for Phoenix stocks to potentially take off on earnings. TSLA has high short interest. That, coupled with a surprise, lead to a huge move.
LRCX:
TSLA:
TSLA didn’t 100% fit the rules of the trade, since normally I wait to see if I get a 15 minute range breach AFTER the initial gap up on earnings. You want to make sure you’re not buying peak emotion. That’s why I look for continuation after the first 15 minute range. But, due to the high short interest, it ended up taking off and squeezing tears from shorts the rest of the day on Friday and it continues today.
LRCX is a leader in the space and has a history of this type of move. This one fit my criteria perfectly, and the options setup played out perfectly.
Trade earnings season with me
During earnings season, I look for opportunities before and after a company’s report. One of the post-earnings setups I watch for in the Mastering the Trade room at Simpler Trading is the 2x move: a stock moving more than twice its expected earnings move.
From there, I look for signs that momentum can continue, study how the chart is developing, and consider where an entry and risk plan may make sense. I want to see how the setup develops after the initial reaction before deciding whether it fits my approach.
If you’d like to follow my market analysis and trading setups live, join me in the Mastering the Trade room. We’ll work through the market together, including the earnings-season opportunities and post-earnings 2x moves on my radar.
Live Trade with Me in Mastering the Trade →
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