What I am about to share with you works well in any type of market . . . bull, bear, sideways . . . it doesn’t matter. Currently investors are becoming more and more defensive, looking for alternative strategies that will allow them to make money during volatile periods. If this speaks to you, consider using the following tools and strategies to complement your overall investment approach.
Successful options traders share one commonality: They all follow a quant-based approach.
Years ago, I never thought it made sense to trade earnings. It was a mostly a foreign concept. Due to all the limitations, trading earnings announcements just didn’t make sense from an efficiency standpoint.
Well, things have changed.
Add 52 weekly expiration cycles and a variety of highly liquid products and the clarity of a once-unknown calculation . . . and we now are able to trade earnings news in an efficient and informed manner.
The unknown calculation? Expected move.
What is expected move?
It’s the price movement the market expects during a given expiration cycle and it’s the key to successfully trading earnings announcements. Fortunately, now we have tools that allow us to see, in real-time, the expected move for any given underlying stock around an earnings announcement.
Knowing the expected move and using a few select strategies (which I will discuss in my upcoming webinar . . . click here for information) to coincide with the expected move has allowed my subscribers to reap some nice rewards.
We’ve managed to make cumulative returns of 151.7% since I started the using these strategies during earnings season to trade earnings. The best part is that the average duration of a trade is just over one day. That’s right: slightly over a one-day holding period. The average returns per trade were 9.19% during the last earnings season alone. I anticipate they will be even higher this time around.
Overall our win ratio stands at 70.8% . . . and most of our losses came early on when we first initiated the service. Regardless, we have had a winning track record since the inception of the earnings season strategy back in late October 2017.
Let’s look at a past trade using Starbucks (NYSE: SBUX), which released earnings at the close of trading on Jan. 25, 2018.
As expected, implied volatility (IV) was high. As we move closer and closer to the earnings announcement uncertainty increases, which helps to create the spike in IV. We ALWAYS want to see heightened levels of IV when seeking trading opportunities around earnings. Increased levels of IV means inflated options prices . . . basically, that we can sell options for more premium than usual. Again, I will discuss this among many other factors in my upcoming webinar.
Here is the expected move:
The expected move is from roughly $57.75 to just about $63.75 for a range of approximately $6.
Knowing that the expected move is $6 gives us the opportunity to use a variety of strategies based on our market assumptions in SBUX (bullish, bearish or neutral).
I tend to stick with risk-defined strategies.
We exited the trade the day after for a one-day gain of 16.3%. We also traded it during the prior earnings season and locked in a one-day gain of 38.9%. In both trades we used simple, risk-defined strategies around the expected move.
Just remember: When you trade earnings you should use a small, consistently defined percentage of your capital per trade due to the binary nature of the trade.