How To Use Options To Trade Earnings Season
Believe it or not, it’s that time of the year again… earnings season. Fourth quarter earnings season always seems to hit us by surprise because it happens so soon after the holidays.
But here we are again. Earnings season has just begun. So how can we use options to trade earnings?
Here’s the thing…
Earnings provide savvy investors with excellent opportunity to make big profits. Options are nearly ideal instruments to trade earnings because of their flexibility and risk control properties.
One of the most straightforward ways to use options to trade earnings is to bet a stock will move after earnings – in either direction. Volatility is commonplace after surprise earnings announcements. And, just betting on movement (and not having to pick a direction) is something you can only accomplish with options.
One of the easiest strategies to employ in this situation is to buy straddles or strangles on a stock before earnings. That way, as long as the stock reacts sharply post earnings, the strategy has a chance to make money.
However, straddles and strangles can be expensive, and often times, the stock has to move a whole lot to make it worthwhile. That’s not to say either strategy is a bad idea, it just isn’t as easy as it sounds to make money.
There’s another way to profit off of earning movements which is a tad more unconventional. The idea here would be to wait until after earnings and see if investors overreact to news on a certain stock.
There are plenty of occasions where investors will react strongly to news – especially bad news – and oversell a stock immediately after earnings. This could be a great time to pick up cheap calls on the stock in anticipation of a rebound.
Of course, the reverse can be true as well, but I tend to find investors are prone to oversell rather than overbuy.
Keep an eye on earnings this season and track a few of the stocks that sell off sharply the day after their quarterly report. Watch how many of those stocks rebound in the coming days or weeks. In most of those cases, buying cheap calls after the selloff will have resulted in big winners.
Yours in Profit,
Gordon Lewis
Category: Options Trading
