Strategies to Capitalize on Corporate Earnings Announcements

Understanding the psychology of investing behavior and volatility around corporate earnings

Learn how to use covered calls to reduce the price of buying a call or to hedge for the downside potential of your existing stocks.

Bullish Option | Diagonal Spread
Options and Corporate Earnings

Learn how to set up and profit from diagonal calendar spreads

Most people lose money BUYING options because they are betting against the house… BUT the house ( the options house ) has already priced in the expected move.  Outlier events are super-rare equivalent to willing the lottery. 

 

2 weeks prior to earnings on a MAJOR stock-  buy delta 30 can do 10s for more profit but more variable ) or lower options  

Once this is done, you are done 

If a stock move hard one direction or another, that option is going to do great 

If it gets to a delta 50 ( 30 if you bought delta 10 )), take it off and book your profit 

Otherwise, wait till the last trading session right before earnings to get out of it 

On the day of earnings, we ar looking to exit the long options, and look to our short selling strategy 

 

 

 

 

 

 I saw this video on strategies for earnings and they look great to me.  I am still new to trading so interested in hearing peoples thoughts on these strategies and whether anyone has backtested these strategies.   

https://www.youtube.com/watch?v=dY2TkH_7Qbw&t=4830s 

Summary  

Strategy 1 

2-3 weeks before Earnings  

If you are bullish –   buy the delta 30 call    If you are bearish-  buy the delta 30 put  

If you don’t know –  buy both   Close the day before earnings expecting the profit to increase 3-4x

    *You can try delta 10 where you can get a 10x move but more complicated  

     *Delta 30 is safer at 90% probability but with a 3-4x move  

  *You can do this with a long straddle or strangle too   

Strategy 2 

2pm to 3pm the day of earnings 

Buy the delta 30 call or put – watch the price go up up to 100 percent in the next hour!  

Delta 30s are more stable but delta 10s are very cheap at this time  

This effect is particularly true in the “popular” stocks such as FB, Google, etc but can work for any underlying.  

This is because in the last hours, money usually floods in and the money makers screw them!  

Strategy is to buy at about 2p and sell in 1 hour the last hours before earnings.  

Plan on a 50% return even if it trades sideways and even better if the underlying price goes up  

Strategy 3 

For the 6 days after earnings

Check the historical trend of a underlying for the 6 days after earnings.  This will usually give you the direction and for how long to run the trade 

If the stock gaps up beyond the EM, there is a 95% chance the stock is going higher for 6 days  

Sell puts if the stock gaps up beyond the EM and close at about 6 days  

Premise:  

Anytime a stock gaps up higher than 1.5x the expected move, the stock will go up another 4-5 percent for average of 6 day 

Action:  Buy puts or bet bullish 

Anytime a stock gaps down more than 1.5x the expected move, the stock will move sideways for average of 6 days 

             Action:  Place ICS or bet neutral  

 

 

The two most important reasons for setting up a covered call:

  • Reduce cost basis of buying a stock
  • Hedge an existing stock portfolio if you already own 100 shares of a stock.
  • Covered calls are profitable even if the stock down’t move
Covered calls are profitable unless the stock moves down below the break even price.  

A covered call reduces the cost basis of buying a stock by accepting a premium for selling a put above the stock price.  
 

If you were to sell the 105 put for a premium of 5 dollars.  The collected premium effectively lowers the cost basis of buying 100 shares of the stock at 100 dollars to buying the 100 dollars of shares at 95 dollars.  The break even price is now 95 dollars.

The expected move can be calculated by adding the ATM call and the ATM put.  This is also how the options creators define a one standard deviation move.  

ATM call + ATM put = expected move = 1 SD move

Option Basics

Understanding Implied Volatility Collapse Around Earnings

The key principles in defending debit spreads are to:

Understand IV Collapse –  A 100% certainty 

 

IV rises into earnings and then collapses immediately after, going back to “normal” 

 

This finding is exaggerated for OTM options-  look to sell 30 delta options 

 

IV on any given stock will double or sometime triple from “normal” beginning at about 3 weeks 

 

 

Can roughly calculate IV by adding the ATM call + ATM put   

IV is lower 4-6 before earnings 

Premiums will increase up to the moment of the earnings 

Premiums will collapse immediately after earnings. 

Setup for a crash that happens IMMEDIATELY after the announcement 

Sell a call or put 10 minutes BEFORE the close and BEFORE the earnings announcement 

Close IMMEDIATELY at the open the day AFTER announcement 

Equivalent to about aa 15 minute trade 

 

 

 

Theo price at 160 = 4.83 

 

Note that the ATM theo price doubled while the theo price of the OTM 160 tripled 

 

You can mark this price at the 30 delta 

 

Therefore 2-3 weeks prior to expiration, buy the delta 30 call or put and watch your value increase 2-3 times as earnings approaches ( as IV increases ) 

Strategy 2-3 weeks prior to earnings: 

If you are bullish –   buy the delta 30 call 

If you are bearish-  buy the delta 30 put 

If you don’t know –  buy both 

Strategy for day of earnings –   

2-3 pm prior to earnings 

Buy the delta 30 call or put – watch the price go up up to 100 percent in the next hour! 

Delta 30s are more stable but delta 10s are very cheap at this time 

This effect is particularly true in the “popular” stocks such as FB, Google, etc but can work for any underlying. 

This is because in the last hours, money usually floods in and the money makers screw them! 

Strategy is to buy at about 2p and sell in 1 hour the last hours before earnings. 

Plan on a 50% return if it trades sideways and 100 if the price goes up 

Earnings Strategy No. 2

Playing increasing volatility the last few hours before earnings

The key principles in defending debit spreads are to:

Understand IV Collapse –  A 100% certainty 

 

IV rises into earnings and then collapses immediately after, going back to “normal” 

 

This finding is exaggerated for OTM options-  look to sell 30 delta options 

 

IV on any given stock will double or sometime triple from “normal” beginning at about 3 weeks 

 

 

Can roughly calculate IV by adding the ATM call + ATM put   

IV is lower 4-6 before earnings 

Premiums will increase up to the moment of the earnings 

Premiums will collapse immediately after earnings. 

Setup for a crash that happens IMMEDIATELY after the announcement 

Sell a call or put 10 minutes BEFORE the close and BEFORE the earnings announcement 

Close IMMEDIATELY at the open the day AFTER announcement 

Equivalent to about aa 15 minute trade 

 

 

 

Theo price at 160 = 4.83 

 

Note that the ATM theo price doubled while the theo price of the OTM 160 tripled 

 

You can mark this price at the 30 delta 

 

Therefore 2-3 weeks prior to expiration, buy the delta 30 call or put and watch your value increase 2-3 times as earnings approaches ( as IV increases ) 

Strategy 2-3 weeks prior to earnings: 

If you are bullish –   buy the delta 30 call 

If you are bearish-  buy the delta 30 put 

If you don’t know –  buy both 

Strategy for day of earnings –   

2-3 pm prior to earnings 

Buy the delta 30 call or put – watch the price go up up to 100 percent in the next hour! 

Delta 30s are more stable but delta 10s are very cheap at this time 

This effect is particularly true in the “popular” stocks such as FB, Google, etc but can work for any underlying. 

This is because in the last hours, money usually floods in and the money makers screw them! 

Strategy is to buy at about 2p and sell in 1 hour the last hours before earnings. 

Plan on a 50% return if it trades sideways and 100 if the price goes up 

Earnings Strategy No. 2

Play rising volatility 2-3 weeks prior to earnings

The key principles in defending debit spreads are to:

Understand IV Collapse –  A 100% certainty 

 

IV rises into earnings and then collapses immediately after, going back to “normal” 

 

This finding is exaggerated for OTM options-  look to sell 30 delta options 

 

IV on any given stock will double or sometime triple from “normal” beginning at about 3 weeks 

 

 

Can roughly calculate IV by adding the ATM call + ATM put   

 

 

 

Theo price at 160 = 4.83 

 

Note that the ATM theo price doubled while the theo price of the OTM 160 tripled 

 

You can mark this price at the 30 delta 

 

Therefore 2-3 weeks prior to expiration, buy the delta 30 call or put and watch your value increase 2-3 times as earnings approaches ( as IV increases ) 

Strategy 2-3 weeks prior to earnings: 

If you are bullish –   buy the delta 30 call 

If you are bearish-  buy the delta 30 put 

If you don’t know –  buy both 

Strategy for day of earnings –   

2-3 pm prior to earnings 

Buy the delta 30 call or put – watch the price go up up to 100 percent in the next hour! 

Delta 30s are more stable but delta 10s are very cheap at this time 

This effect is particularly true in the “popular” stocks such as FB, Google, etc but can work for any underlying. 

This is because in the last hours, money usually floods in and the money makers screw them! 

Strategy is to buy at about 2p and sell in 1 hour the last hours before earnings. 

Plan on a 50% return if it trades sideways and 100 if the price goes up 

Earnings Strategy No. 2

Trading on Volatility Collapse the Day Moments after Earnings Announcements the day after.

The key principles in defending debit spreads are to:

Understand IV Collapse –  A 100% certainty 

 

IV rises into earnings and then collapses immediately after, going back to “normal” 

 

This finding is exaggerated for OTM options-  look to sell 30 delta options 

 

IV on any given stock will double or sometime triple from “normal” beginning at about 3 weeks 

 

 

Can roughly calculate IV by adding the ATM call + ATM put   

IV just collapsed  

 

 

 

Strategy :   

 

 

 

Buy straddles immediately after the earnings release 

 

 

 

IV just collapsed so premiums just collapsed.  You won’t find them any cheaper 

 

Buy it immediately but get out before 20-30 minutes.   

 

After 30 minutes after the gap up or down where it usually moves sideways 

 

Buy long straddle calls/puts as the premium is now cheap BUT get out at 50% – don’t get greedy  

Earnings Strategy No. 2

Trading on the 6 days after earnings

The key principles in defending debit spreads are to:

Understand IV Collapse –  A 100% certainty 

 

IV rises into earnings and then collapses immediately after, going back to “normal” 

 

This finding is exaggerated for OTM options-  look to sell 30 delta options 

 

IV on any given stock will double or sometime triple from “normal” beginning at about 3 weeks 

 

 

Can roughly calculate IV by adding the ATM call + ATM put   

ICheck the historical trend of a underlying for the 6 days after earnings 

 

This will usually give you the direction and for how long 

 

If the stock gaps up beyond the EM, there is a 95% chance the stock is going higher for 6 days 

 

 

 

Strategy 

 

Sell puts if the stock gaps up beyond the EM and close at about 6 days 

 

 

 

 

 

After earnings –  Anytime a stock gaps up higher than 1.5x the expected move, the stock will go up another 4-5 percent for average of 6 days 

 

 Place puts are bet bullish 

 

 

 

After earnings –  Anytime a stock gaps down more than 1.5x the expected move, the stock will move sideways for average of 6 days 

 

Place ICS or bet neutral 

 

 

Option Basics

Understanding that there is often a repetitive pattern to how stocks react to earnings

General:

  •  

Stocks have seasonality:   

Strategy, check the seasonality of your stock

 

Check the average price move of the stock prior to earnings 

 

Check the average IV move prior to earnings 

 

 

Facebook: 

 

  • Average Q1 move 1% 
  • Average Q2 move 5% 
  • Average Q3 move 0.6% 
  • Average Q4 move 6% 

 

 

 

 

 

If the stock gaps up beyond the EM, there is a 95% chance the stock is going higher for 6 days 

 

 

 

 

The higher the EVR, the higher the potential for exceeding the expected move 

 

 

 

  • Standard deviation chart implies that a stock will be contained within by definition 1 standard deviation 68% of the time 

  • This means that a delta 43 option if you sell them, will expire worthless 68 percent of the time 
  • Bonus—delta 30 strikes, for this reason often represent hidden support and resistance on the charts
  • A stock will be contained within a 2SD move 95 percent of the time 
  • This means that delta 5 options, if you sell them, will expire 95% of the time 
  • For simplicity sake, you can start referring to percent probabilty as deltas 
  • 1 SD is delta 30 
  • 2 SD is delta 5 
  • 1.5 SD is delta 15 – 86% probability of success 

 

 

 

 

 

Option Basics

Earnings Resources

General:

  •  

Simpler Options : Earnings Secrets Webinar on Youtube

Http😕//biz.yahoo.com/research/earncal/today.html

Earningswhispers.com

Optionslam.com

www.optionslam.com/partner_info/simplertrading

Simplertrading.com/secrets

Option Basics

Rolling Deltas

The key principles in defending debit spreads are to:

Understand IV Collapse –  A 100% certainty 

 

IV rises into earnings and then collapses immediately after, going back to “normal” 

 

This finding is exaggerated for OTM options-  look to sell 30 delta options 

 

IV on any given stock will double or sometime triple from “normal” beginning at about 3 weeks 

 

 

Can roughly calculate IV by adding the ATM call + ATM put   

This is a risk management strategy to lock in your profits

If you have a call option and the stock moves higher. This means you are making money.

But the delta on the option is also increasing

This means that if you were making 30 cents for each 1 dollar move in the underlying, now you are making 50 cents for each 1 dollar move in the underlying… or losing

If you bought the call option at delta 30 and made 4x the value, you want to close and repurchase at the new delta 30.

This rolling maneuver locks in your profit so that if the stock moves against you, you have locked in profits

So the delta of an option lets you know 2 very important pieces of information

How much the option will move if the underlying stock moves 1 dollar

A delta 79 option will move 70 cents

A delta 39 option will move 30 cents

The approx. percentage chance that a stock will reach that strike price

An OTM delta 19 option means that the stock has about 10% chance of reaching that strike price ( let alone exceeding ) based on statistical models

Option Basics

How do you defend a vertical debit spread?

General:

  • Debit spreads are direction trades that bet on the stock moving up for call spreads or down for put spreads.
  • Call debit spreads are created by buying a call while selling a call at a higher strike price
  • Put debit spreads are created by buying a put while selling a put at a lower strike price.
  • You will only make an adjustment if the price of the stock has moved completely against you and has moved beyond the long strike.
  • You will not make an adjustment if the price of the stock remains between the two strikes as you will have make a partial profit.

The key principles in defending debit spreads are to:

  1. Adjust the short option toward the long option *but not beyond the option’s break even point for a credit
  2. Do nothing
  3. Create an Iron Condor

Adjusting the short option:

  • Always adjust ( roll ) the short option toward the long for a credit
  • Gaining credits will reduce the cost basis of the long option
  • Never adjust the short option beyond the break even point

Do nothing

  • Doing nothing is an option if the loss will be small or if rolling is difficult to obtain a decent credit.
  • If you aren’t able to roll for decent credit, you will be accepting a greater risk ( loss ) and paying for it.
Set up an Iron Condor:
  • Setting up an iron condor on the other side and centered around the stock price will reduce the cost basis while theoretically creating a winning trade.

Option Basics

The Most Important Option Concepts

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