Earnings season kicked off this morning this morning with reports from big banks such as JP Morgan (JPM) and CitiGroup. Both beat estimates handily and initially saw their stocks move sharply higher, only to quickly reverse. This activity highlights the challenges and opportunities for options trading.
That’s why I want to introduce you to my Earnings360 Service.
Last night, I put on a training session explaining how I take an option-centric approach and showed how I employ strategies that take advantage of the Post Earnings Premium Crush (PEPC) to produce profitable earnings trades.
One of the reasons earnings can be difficult to trade is there are many moving parts you have to get right:
1)What will the actual results be? Meaning, will the company meet, beat or miss the estimates and what type of guidance.
2) What will the reaction be? If the stock has already run up ahead of the earnings, there might be a “sell the news” response. Or an out-of-favor stock that beats expectations may shoot higher on a short squeeze, as bears scramble for cover.
3) What percentage move are the options pricing in? Option market makers know that certain stocks have a propensity for extreme moves caused by earnings reports and price the option puts and calls appropriately. This takes the form of an increase in implied volatility and the premiums get pumped up prior to the earnings report.
Post Earnings Premium Crush (PEPC)
But there is one variable that we can reliable measure, predict and profit from.
This post earnings premiums crush (PEPC) occurs regardless of the stock’s reaction up or down. The predictability of implied volatility is the single greatest edge we have in trading earnings.
Can you see the pattern of implied volatility for Netflix?
It’s not hard to guess on which dates the quarterly earnings were reported, is it!
And after Netflix reports earnings after the close Monday can you guess where the direction the yellow implied volatility line will move?
The predictable increase and then decline, or reversion to the mean, of implied volatility is what we will harness to produce consistent options trading profits.
My results over the past two earnings seasons speak for themselves.
- $500 allocation per trade
- 48 trades
- 32 Winners (66% win rate)
- Average gain of 81%
- Average loss: 42%
- Total profit: $5,450
One of the reasons I expect this earnings season to be especially profitable is that we have now entered into a higher volatility environment, which will give us an even larger PEPC. This will provide for very attractive risk/reward set ups.
I anticipate being able to unearth 3-4 trades per week in which I will spell out the exact entry and exit points and will recap each week with a live Webinar on Fridays. Good luck in your own options trading, and have a good weekend.
