Earnings Trades – a look at Strategies

For traders/investors that participate in Earnings – with trades designed specifically for that event – there are a variety of approaches available. One of the key elements involves the use of Options and there are several key reasons for this:

  • 1) You can define your risk by owning Calls, Calls Spreads, Puts, Put Spreads etc. What you pay for these Options is what you have at risk
  • 2) The amount of capital in the trade is far less than with using stock
  • 3) The increasing availability of Weekly Options allows for an expanded set of choices in structuring a trade (like using a Call Calendar for example)
  • Leverage. You can buy 10 contracts and control 1000 shares of stock. Nice

The above list assumes that you want to make a directional bet – that you have a bias. I see nothing wrong with this approach and utilize it often each Earnings season. However, there is one strategy I use that elicits a lot of questions/comments from the trading community and that is the approach of selling a Straddle or Strangle.

In this strategy there are several important things to remember/consider:

1) You don’t have a bias, and/or don’t care one way or the other. If you are selling premium this way, you simply are looking to sell elevated premium AND you want price to stay within a range

2) If using Weekly Options, you have so many additional choices to adjust the trade IF price gets beyond the range afforded by the collected premium

3) There is a % of the time where the collected premium will not be sufficient. It happens. It is part of the probability of this approach (and why you want to keep it under 20% of the time that a hedge and/or adjustment may be required)

4) Strike selection becomes crucial (as in every trade) but more so here in that you are short premium in both directions

5) Don’t do this on stocks with an 5 ATR. LOL. You want elevated premium, but you don’t want 15% moves over and over.

I have a recent trade that I did this week that you can review here on the Blog where I utilized this approach ($SONC). The goal is simple: keep price within a range and monitor the trade to expiration. You want to keep as much of the premium as possible, the “gain”. In this example I happened to hedge with stock in after hours so this step expanded my “cushion” thus widening the range.

The $MON trade I did this week has not required me to do any hedging as it looks to coast into expiration Friday. I will be able to close the trade or adjust to January Monthly (next week) if I desire to do so at that time.

 

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