To an options trader, this means you want to be long calls on a stock that is going up in price or long puts when a stock is going down in price. Options premiums can fluctuate significantly going into an earnings announcement… and things can really get wild when the announcement is made and the stock price moves on the news. If you had long call options, then you were on the right side of the trade. In this case, long put options would put you on the right side of the trade.
That said, it can be quite difficult to judge which way a stock will move on an earnings announcement these gaps can be pretty significant — ask anyone who has seen what The Priceline Group Inc.
GOOG has done the day after their earnings announcements. But what if I told you that can trade during earnings season without having to guess which way a stock will move?
Here are four scenarios that can — and do — play out following an earnings announcements:. The best way to avoid the frustration of guessing which way a stock is going to move on an earnings announcement is to employ one of my favorite strategies: With a straddle you do not have the pressure of having to pick which option you have to buy in order to make money. If you buy calls only, the stock has to go higher; if you buy puts only the stock has to go lower.
But a straddle allows traders to potentially benefit whether the stock goes higher or lower. A straddle allows you to take a number of variables out of the equation, questions like: You are incurring more cost by buying both options, so you need the underlying to make a significant move. And by significant I mean the underlying should have the possibility to a big enough price move to cover the cost of the trade. For more on this great non-directional trading strategy, click here. Before we get to that, let me briefly discuss the concern about Implied Volatility IV around earnings.
IV tends to increase going into an earnings report as the speculation of what the report will mean to the stock price going forward increases. Buyers of options, even the straddle trader, have to be careful and know they are buying higher IV in their options prices during the period before an earnings announcement. It becomes a situation where one is likely to be buying at a high IV to sell at an even higher IV. The below image shows a spike in IV in the options of a company coming up on their earnings:.
The risk in buying ahead of the earnings announcement is the fact the IV is likely to be higher. Once the announcement is made and the news is out, there is no more speculation, and IV heads lower. Closing before the announcement — The biggest consideration in closing down your straddle before an earnings announcement is that you risk the stock actually gapping or moving enough on good or bad news, and you miss out on those profits if you would have if you held over the announcement.
Closing the day after the announcement — This becomes a situation where you may have profit in the trade as the stock has run up and implied volatility is increasing, which pumps up the premium, increasing the call option side of the straddle. The risk here is that, following the announcement, any of the four scenarios I mentioned earlier can happen — and wreak havoc on your options.
The stock might gap in the opposite direction, bringing the options value back to where you started. Even though a breakeven situation is better than a loss, having the stock come back to where it was when you put on the trade is frustrating.
This is how I pinpoint stocks with the chance to make the biggest price moves in either direction , and how I know when to close down my straddles. Click to View Finally, you can even analyze what IV does prior to and after the earnings announcement. The image below shows you what happens to IV after the earnings announcement:. Click to View Knowing how the underlying stock has behaved during past earnings announcements can give you a better chance at profitably closing out your straddle.
The best way to trade options during earnings season is to use my favorite non-directional trading strategy: The straddle allows you to profit whether the stock moves up or down on the announcement, so long as it moves enough to cover the cost of the trade.
How can a trader capture profit from IV rushing out of the premium without subjecting ones self to unlimited risk? Email will not be published Required. View this page online: Click here for this special report. The challenge, of course, is figuring out how to end up on the right side of the trade.
Let me show you… Challenge 1: Here are four scenarios that can — and do — play out following an earnings announcements: They still have negative earnings, but they are deemed to be doing better than expected by not losing as much, so things are deemed moving in the right direction and the stock trades higher. The Straddle The best way to avoid the frustration of guessing which way a stock is going to move on an earnings announcement is to employ one of my favorite strategies: Take a look at the image below, which depicts what can happen to IV going into earnings: The below image shows a spike in IV in the options of a company coming up on their earnings: That is the risk of opportunity lost.
The image below shows you what happens to IV after the earnings announcement: Using the Straddle to Trade Earnings The best way to trade options during earnings season is to use my favorite non-directional trading strategy: There are risks to closing out early missing profits from the announcement itself or holding your trade too long IV crush or time decay bringing down the price of your options.
The best thing to do is know your history — research how the underlying stock has behaved during past earnings announcements, and trade accordingly. April 8, at 2: April 9, at 3:More...