There are many traders that choose to position ahead of an event like an earnings report hoping to catch a nice move. One of the simplest methods is to use Options to make a directional event (own a Call/Call spread or Put/Put spread).

In the case of $WFC I have elected to simply buy Jan 35 Calls to position for an upside move:

Note the volume into the close.

Here are the some benefits of this approach:

• Risk is defined. What I paid for the Calls is all I can lose
• No cap to an upside move
• Can hedge in after hours or pre-market with stock to go more Delta neutral if there are gains that I want to lock in
• If into market hours after the event, can then create a Call Spread if appropriate

So, what happens if the stock pulls back? Here are a few scenarios that can play out:

• Stock pulls back 3% after the event
• The Implied Volatility (IV) goes poof so the Call value will diminish quickly
• If the pullback is met with dip buyers, I can choose to sell Puts (to attempt to cover cost of the Calls, thus creating a Risk Reversal) to play for a bounce
• If the bounce does occur, can then sell upside Calls to create a Call spread and use these proceeds to buy back the short Puts if prudent to do so

Just a few thoughts on what the tactical work can be after an event – after the reaction.