Earnings Strategies That Can Produce More Consistent Returns

Earnings Strategies That Can Produce More Consistent Returns

Posted On October 20, 2022 1:44 pm

Earlier this week, I hosted a webinar explaining my Earnings360 approach to trading during earnings season. I also executed a live trade State Street (STT), which resulted in a 63% profit! We followed that up on Tuesday with an iron condor in Netflix (NFLX) which we closed for a 47% gain.

Talk about a strong start…

Both trades display how I harness implied volatility (IV) behavior to generate consistent profits from these often-chaotic events.

It’s a good start and we plan to keep the momentum going as earnings reports shift into high gear next week. We have another five weeks to push our record to 17 out of 19 profitable quarters.

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On the web call, I described how we use the Post Earnings Premium Crush (PEPC) to produce 80% – 150% gains on earnings trades. However, while PEPC provides an edge, there’s still some risk of the stock moving more than expected, or in a different direction.

Today, I want to look at another strategy we employ that also delivers consistent returns over a four-day period without actually holding the position through the report. I refer to this as Pre-Earnings Premium Expansion (PEPE).

All told, over 18 quarters, Earnings360 has made 89 PEPE trades for an average gain of 27% on an 82% win rate.

This strategy leverages the IV increase that precedes earnings; avoiding the actual event altogether. Just as PEPC is predictable, so is the pumping of premium leading into the release; the basis for PEPE trades.

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

One good strategy for leveraging rising IV leading into earnings is a calendar spread. This is where you sell an option that expires prior to earnings while simultaneously purchasing one expiring after the event. Below, 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.

Like any calendar spread, it benefits from the accelerated decay (Theta) of the nearer-dated options sold short. This pricing behavior gets an added tailwind when the report release approaches. There will be a rise, which results in a spread value increase. To keep the position Delta neutral, both the put and call calendars should be established.

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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.

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

If all this sounds confusing, don’t worry. I promise after you follow along with my trades, you will feel comfortable taking your own in no times, but first you have to join to find out what all the fuss is about.

The best traders are the ones that find an edge that give them a higher probability of success. If you look at our record, you can see we are stacking the odds in our favor.

Join us as we go for our 17th profitable earnings season.

Wishing You Success,


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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.

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