By: Steve Smith
With another Earnings Season upon us, I’ll be leading another Earnings360 quarterly program. The first trade recommendations will be issued next week. I expect to make about 30 trades during an action-packed six weeks of earnings announcements.
To learn all about my unique and time-tested approach to trading during these volatile events, Join me tomorrow, Thursday, January 13 at 4:15 PM ET/1:15 PM PT for this exclusive event.
During this live event, I’ll explain my process and reveal the strategies that have led to the Earnings360 service-producing consistent profits for 14 out of 16 quarters over the past four years. consecutive quarters.
Honestly speaking, even under the best circumstances, earnings can be extremely tricky to trade, with many moving and unknown parts. Will the company miss or beat expectations? What will be the guidance? Will traders “sell the news,” or buy into “the unknown” believing the recent decline has priced in a near-worst-case scenario?
However, there’s one predictable pricing behavior that savvy option traders use to produce steady profits. Given all the recent volatility and numerous unknowns, options premiums will be at record-high levels as market-makers must price options for outsized moves.
So, how do you trade earnings in a world without guidance? Here’s a quick guide that rests on taking an options-centric approach.
Use the Post Earnings Premium Crushed
The one reliable item is that no matter what a company reports, or how the stock reacts, the options will undergo a Post Earnings Premium Crush (PEPC) which is my label for how implied volatility contracts, immediately follows the report no matter what the stock does.
As you can see, the repeating implied volatility pattern of Netflix (NFLX) options are spiking and retreating on the quarterly reports.
You’ll often hear traders cite what percentage move options are “pricing in” the earnings. The quick back-of-the-envelope calculation for gauging the expected move magnitude is to add up the at-the-money straddle.
This article does a great job of explaining how to use the straddle to assess expectations and potentially profit.
Once option traders are armed with this knowledge, they advance to using spreads to mitigate PEPC’s impact when looking to make a directional bet. Some will graduate to getting this predictable pricing behavior in their favor by selling premium via strangles, or the more sensible limited-risk iron condors. But, these strategies still carry the risk of trying to predict, if not the direction, then the move’s magnitude.
While the Earnings360 option-centric approach isn’t a guarantee, it does stack the odds considerably more in our favor by getting the PEPC tailwind at our back. All Earnings360 traders use some form of a spread to give us a high probability of profit while assuming a limited risk.
In my next article, I’ll describe the Pre-Earnings Premium (PEPE strategy). I’ll also be demonstrating and executing a PEPE trade live during the web presentation, Do not miss it.