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Trading Options on Earnings


Traders and investors should always be looking for seasonal opportunities in the stock market. One of the easiest to identify seasonal opportunities is earnings season.


The timing is pretty much indisputable. While other seasonal trades such as, ‘sell in May, and go away,’ and the January effect is based on the calendar as well, we don’t have the same benefit that we do with earnings dates, in which the catalyst is narrowed down to an exact date and time. By having a precise date and time of a known, market-moving catalyst, we can use this information to identify opportunities – quarter after quarter.

So, how does a trader go about identifying trading opportunities during earnings season? Start with breaking down these three steps:

Identifying Patterns & Using Statistics

Trading is all about recognizing patterns and using those patterns to hone your edge. Since earnings season is based on the calendar, we can look for patterns that occur quarter after quarter to identify potential repeatable moves.

Studying past quarters and looking for similarities and differences, especially when comparing similar circumstances, is how traders can identify current similarities for tradeable moves.

How can this be done?

Visually is the first step, at least for me, as I primarily enjoy looking at and analyzing different chart patterns myself. However, using a data crunch is highly beneficial as it can do more than just one person alone with the naked eye can!

Turning to statistics can allow you to crunch a significant amount of data in a short timeframe, plus it gives you precise values to work with, rather than assumptions made based on what you can visually see.

By analyzing patterns and using statistics, traders can narrow down their favorite opportunities that provide tradeable setups.

Next, let’s talk about those setups, along with the timing of them.

Setups & Timing

By using patterns and statistics, traders can identify setups. Setups are distinct moments in time in which a pattern is more than likely to resolve one way versus another. By identifying setups, and then using those setups to determine an approximate time frame for a trade, traders can jump on moves surrounding earnings.

Three examples of regular setups based on specific timing include:

Pre-earnings momentum setups: These trades used to be called, ‘The Run into Earnings,’ as throughout the bull market, typically, bullish stocks would rally pre-earnings as investors bought into shares prior to potentially explosive earnings reports. Now that we are in a bear market, this setup has shifted to ‘Earnings Destruction,’ where bearish tickers roll over and die prior to earnings as investors jump ship prior to destructive reports.

In either scenario, this setup is about a move that generally lasts around 2-4 weeks, and is one of my favorite swing trading opportunities prior to earnings season. Using patterns and statistics, traders can identify which direction a ticker is likely to move in prior to an upcoming earnings report.

Earnings Trades: These are generally overnight trades, at least in the method in which I set them up. The idea is that the options market provides a distinct opportunity to trade known, news-related events, due to the regular patterns in which price, implied volatility, and options pricing function around an earnings report. Because options pricing patterns, plus price patterns, and then statistics can be analyzed, this provides options traders overnight opportunity around news-related events like earnings.

Post-earnings moves: These opportunities are a bit rare, just because much of the time, the more predictable moves occur prior to earnings. However, that doesn’t mean we shouldn’t be on the lookout for them! Post-earnings opportunities arise when there is an explosive move either to the upside or downside upon an earnings report. Traders can identify these moves, especially if they fall within a regular pattern, and trade this move either as a day trade or a swing trade, which generally lasts around one week.

Each setup comes with various methods in which to trade, it just depends on how long you’re planning to be in the trade, the risk you’d like to take, if you’re placing a directional or neutral trade, and what kind of options strategies you would like to use.

Directional vs. Neutral Options Trades

Now, one question I get is, “Can you trade earnings using just stock, no options?” The answer is yes and no. You can most certainly trade the pre-earnings momentum moves, and post-earnings moves using just stock. However, the overnight earnings trades can often be neutral in nature, and can’t be traded using stock alone. Yes, you can use stock if your trade is directional, but the primary reason for using options to trade especially the pre-earnings momentum and earnings setups, is because you aren’t just taking advantage of direction – you’re also using options to take advantage of the nuances and complexities of options that don’t exist by just using stock alone.

Directional options trades, such as long calls or puts prior to earnings are meant to take advantage of not just a rise or fall in price, but also a rise in implied volatility. Implied volatility is a core component that impacts options pricing, and it rises going into earnings. By trading pre-earnings setups in the options market versus just utilizing stock, you can take advantage of direction, plus also take advantage of implied volatility.

Neutral options trades, such as iron condors, can be sold by options traders specifically over earnings, as a method of taking advantage of the eventual fall in implied volatility after the earnings report is done. Selling iron condors on earnings is a strategy options traders can use to sell premium, something that doesn’t exist just by trading stock alone. Premium makes up a portion of the value of an options contract, and it decays over time. By selling premium on earnings, options traders can take advantage of a situation in which implied volatility and premium are high due to a news-related event, and it falls like clockwork post-event. This reality gives options traders premium-selling opportunities based on the event. The premium that gets sold can be bought back post-report, ideally for less than you sold it for, and for a profit.

Of course, sometimes you get it wrong, and you have to pay more to buy it back versus what you sold it for, resulting in a loss – but, that is why using your patterns, statistics, and setups quarter over quarter to hone and sharpen your edge should be a key focus for traders utilizing this and any strategy on a quarterly basis!

Want to learn more? Join me on Wednesday, September 28th as I kick off earnings season and identify key opportunities this quarter! If you’re a Simpler Trading member, join me in the Free Trading Room this Wednesday. If not, sign up for free by clicking on the link below!



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