Options Trading Strategies For Earnings Season

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• OPTIONS TRADING

Options Trading Strategies For Earnings Season
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• Hi, My name is Steve and Im with Options Trading
  Research, today were reviewing our recently
  published article

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• Options Trading Strategies For Earnings Season

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• Earnings season is once again upon us, creating
  opportunities for both large gains and large
  losses. As a rule of thumb, individual stocks
  tend to react more significantly during earnings
  periods than other times of the year.

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• The problem is figuring out which way a stock is
  going to move. In other words, how are investors
  going to react to good or bad earnings results?

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• As always, picking a short-term direction of a
  stock is can be extremely challenging. Youre
  never quite sure whats going to happen after a
  earnings release until it actually happens. Will
  investors shrug off a bit of bad news?

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• Will they find a ray of sunlight in an otherwise
  negative report? Is good news good enough?
  Thats why it tends to be easier to decide
  whether a stock is going to move in general,
  rather than pick a direction.

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• Let me explain With options, its a piece of
  cake to bet on a stocks movement and you dont
  have to guess what direction the move is going to
  take.

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• Conversely, you could bet on lack of movement
  using options, although this tends to be a
  riskier proposition.

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• Okay, so what options trading strategies are good
  for trading earnings?

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• Before I get into the strategies themselves,
  lets look at an example of a stock that tends to
  move quite a bit on earnings days.
• Heres Amazon (AMZN)

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• AMZN is known throughout the industry as a big
  mover on earnings days. You can see on the
  chart, once a quarter, theres a big spike in the
  price causing a stair-like pattern to emerge.

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• Now, AMZN has had a very good year for earnings
  results, but in the past those moves were
  sometimes large down moves.

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• The key here is that the share price definitely
  moves after earnings come out. So the question
  is, how can we capitalize off this knowledge?

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• Thats were options come in.

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• There are two primary options strategies to use
  when trading during earnings season at least if
  your goal is trade movement (or lack thereof).

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• These two strategies are the straddle and the
  strangle. Follow the links for more info on each
  strategy. In a nutshell, a straddle is when you
  buy a call and a put at the same strike, in the
  same expiration month, usually at-the-money.

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• So for AMZN, It could be something like buying
  the November 525 call and 525 put at the same
  time. In this case your trade makes money if AMZN
  moves quite a bit higher or lower than 525 by
  November expiration.

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• Keep in mind, by using November, the strategy
  takes into account earnings. However, this type
  of strategy on a high priced stock like AMZN is
  going to be very expensive.

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• The stock will have to move over 60 at current
  prices for this trade to payoff. Thats where the
  strangle comes in.

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• A strangle is the same as a straddle, except you
  buy out-of-the-money calls and puts instead of
  at-the-money. Buy purchasing OTM options, the
  cost of the spread is going to be less.

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• For example, the AMZN 500-550 strangle (buying
  the 500 put and the 550 call) may cost about 40
  instead of 60. However, the stock has move
  farther in each direction to make money.

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• In other words, the strangle is cheaper, but the
  upside is less than the straddle. On the other
  hand, you could sell a straddle or strangle if
  you think AMZN isnt going to react to earnings
  as much as it normally does.

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• Clearly, youd be collecting very juicy premiums
  in order to do so. However, your risk is
  essentially unlimited in this case and you have
  to have a big margin account to make these types
  of trades.

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• These are considered more advanced strategies
  than the buy-side counterparts. Both straddles
  and strangles can be quite useful for earnings
  season. The key is to not pay too much.

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• I like use straddles on cheaper stocks, with more
  affordable premiums. If you want to play the big
  moving, higher priced names, use strangles
  instead just dont buy too far out of the money.

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• Used properly, straddles and strangles can result
  in substantial profits during earnings seasons.
  As always, the primary factor is doing your
  research and finding the best mix of risk versus
  return before making a trade.

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