The strategy I am about to introduce has allowed us to reap over 898.5% in gains since October 2017 (click here for details). That’s right, 898.5% . . . and we have the track record of three years to back it up.
Some of you may have participated in the recent trade in CVS that I mentioned here last Sunday. If so, you could have reaped a one-day gain of 13.6%. So far this earnings season, we have generated a total return of 53.7%.
You see, years ago, I never thought it made sense to trade earnings. It was a foreign concept due to numerous limitations (commissions, liquidity, no weekly expirations). Trading earnings announcements just didn’t make sense from an efficiency standpoint.
Well, things have dramatically changed.
Add 52 weekly expiration cycles, a variety of highly liquid products and the clarity of a once unknown calculation . . . and we now have the opportunity to trade earnings news in an efficient, informed and highly profitable manner.
Today I want to focus on the “unknown calculation” . . . It’s a major advance in the way all traders approach the market, especially during earnings season.
The unknown calculation? Expected move.
Well, I’m sure most of you are asking, what is “expected move”?
Expected move is the price movement the market expects during a given expiration cycle. 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 its earnings announcement.
This one calculation gives us the supply and demand for any individual security in real-time, and that is incredible information to have if you are trading during earnings season.
During the coming week I will be sending out potential trades in McDonald’s, D.R. Horton, Disney, Cisco Systems and several others. To learn how to use this approach and to get details on the trades, please click here to reserve a spot at my upcoming briefing.
Let’s look at Disney (NYSE: DIS) trade on earnings.The Disney earnings report is due on Nov. 12 after the closing bell.
As expected, implied volatility (IV) is high as we move closer to the uncertainty of the Disney earnings announcement. 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 means we can sell options for more premium than usual.
To evaluate a Disney trade, we have several tools at our disposal to figure out what the expected move is for Disney immediately following its earnings announcement. You can see the expected move embedded in the options chain on the Tastyworks platform. The expected move is from $120 to $132.50, for an expected move or range of $12.50.
Knowing that the expected move is $12.50 gives us the opportunity to utilize a variety of strategies based on our market assumptions in Disney (bullish, bearish or neutral).
I tend to stick with risk-defined, neutral-based strategies. This one approach has been the leading factor in the majority of the 898.5% gains I have reaped since starting the strategy just under three years ago.
Since we know the expected move in Disney is $12.50 after Disney earnings are reported, we can create a range-bound Disney trade around the expected range as seen in the options chain above. And as long as Disney shares trade within that range immediately following the Disney earnings announcement, we should be able to buy back the spread for a nice profit due to volatility crush.
The probability of that occurring is roughly 89% on the downside and over 86% on the upside.
The increase in volatility, followed by the rapid decline, affords us the opportunity to take advantage of some nice profits as we make a Disney trade.
I hope this short article on expected move gives you the insight you need to trade earnings and make sound judgments on every earnings trade you decide to take on.
If you would like to know more about the strategy, risk-management techniques and more importantly, how we have reaped over 898% since we started to trade earnings, please click here. I’ll take all of your questions during this deep-dive event.