An Earnings Season Trading Strategy That’s Produced an 81% Win Rate

An Earnings Season Trading Strategy That’s Produced an 81% Win Rate

Posted On April 13, 2021 12:05 pm

In prior articles, I’ve discussed how I apply the concept of Post Earnings Premium Crush (PEPC) to produce 80%-150% gains on earnings trades. However, as much as PEPC provides an edge, there’s still some risk of the stock moving more than expected, or in a different direction. 

This is the reason that my Earnings360 also employs a more conservative strategy which delivers consistent returns over the course of a four-day period without actually holding the position through the report. 

Did You Miss Friday’s EXCLUSIVE Earnings360 Webinar? Click Here for Your FREE Replay Video

In over 14 quarters, Earnings360 has made 67 Pre-Earnings Premium Expansion (PEPE) trades, achieving an 81% win rate for an average gain of 27%! 

The strategy takes advantage of the implied volatility increase that precedes earnings and avoids the actual event altogether.  Just as PEPC is predictable, so is the pumping up of premium leading into the event (PEPE).  

<The first Earnings Trades begin Tomorrow. Last Chance. Don’t miss Out> 

PEPE’s more subtle than PEPC in that it occurs incrementally over the course of many days.  Here, you can see Schwab’s (SCHW) implied volatility climb in the days leading up to the earnings release before reverting lower after the report. 

SCHW 1 year volatility chart

A strategy for taking advantage of rising IV leading into earnings is calendar spread where you sell an option that expires prior to the earnings while simultaneously purchasing one that expires after the event.  Here, you can see the SCHW order that Earnings360 placed where we sold the weekly puts and calls that precede the earnings report while buying the following week, which contains the report.

[TIME SENSITIVE] Claim Your FREE Earnings360 Replay Video — Before It Is Too Late!

schw snapshot analysis

Like any calendar spread, it benefits from the accelerated decay of the nearer-dated options sold short.  But, this has the added tailwind of when earnings approach the option, including the earnings, will see it rise, causing the spread value to increase.  To keep the position delta neutral, both the put and call calendars should be established. 

These positions must be established in advance and closed before the actual earnings.   The profits might not be as dramatic as catching a huge post-earnings move, but they can be substantial.  More importantly, they can be consistent and have a high probability.  All told over 14 quarters, Earnings360 has made 67 PEPE trades for a 27% average gain on an 82% win rate. 

With weekly options, there should be plenty of situations in the weeks ahead to take advantage of the rise in IV, leading into earnings, by using the PEPE double calendar strategy as a means of producing consistent 30% returns — without taking the risk of holding the position through the earnings report. 

[Last Chance] Grab Your FREE Earnings360 Replay VIDEO to Learn the Unique Trading Approach That’s Won 81% of the Time!

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.