Trading options earnings announcements and stock
The quarterly report is usually accompanied by an earnings conference call streamed over the internet and often includes a PowerPoint presentation to summarize the highlights. Typically, earnings reports are released in the month following the end of the last fiscal quarter.
That means that mid January, April, July and October is a quarterly earnings season with large groups of stocks reporting results each day for a couple weeks. That increased flow of information coming from each company creates some fast price movement. The volatility that accompanies an earnings report can be disruptive to some investors because it is not uncommon for prices to gap just following the news release in between market sessions. On average, the direction of the gap following an earnings release is not very predictive, especially over the long term.
However, the volatility that occurs after the release can still be turned into an interesting options trading opportunity. A popular way to take advantage of the possibility for large price moves on an earnings announcement is to trade option straddles or strangles.
These can be a lot of fun to trade and are very easy to setup. You can find more information about creating and entering an option straddle here. An options straddle is a speculative position in which you take a neutral stance on the market or stock by buying a call and a put. That way, if the market moves a lot, one of those options will become quite valuable and will make up for the losses in the other position.
Traders using these strategies have to get used to long periods of small losses interrupted by a few very large moves. If you are interested in trying a few straddles on your own, find a few upcoming earnings reports and paper trade a few straddles yourself. The materials presented are being provided to you for educational purposes only.
The content was created and is being presented by employees or representatives of Learning Markets, LLC. The information presented or discussed is not a recommendation or an offer of, or solicitation of an offer by Learning Markets or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy.
You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives. Options have a time value depending on how much time there is to expiration of the option. By using very short time frames for option speculation, this time value can be made very small.
Since we know when earnings will be announced and the price reaction to the announcement happens over a very short time, weekly options can be deployed inexpensively by taking advantage for a minimal time value and cost. The concept is to buy an option, just before the earnings announcement, that will expire at the end of the week after the announcement. Since the reaction to an earnings announcement takes only a day or two the holding period for the option can be very short with almost zero time decay in the option price.
The entire option price change will be dominated by the reaction to the earnings announcement. To further reduce the cost of the investment the option should be purchased slightly out-of-the-money OTM. Before we go into the detailed steps and stock selection parameters for this strategy let us take a quick look at a recent example.
If this pattern were to repeat, the upcoming earnings announcement at the close of April 27, might be a candidate for this strategy. In general there is often a rise in Implied Volatility IV just before earnings are announced, which is then followed by a volatility crush return to normal levels after the announcement.