Post feedThe Earnings Trade
Every three months this topic comes up again, so let's talk about it as a group and hopefully uncover a few ideas about how to trade around, through, above, under, an earnings announcement.
On all my presentations I have always taken the route to tell a trader to stay away or get out of the trade prior to an earnings announcement. For the newer trader it is not worth the risk in my opinion and normally they are not positioned properly to take a 100% loss on an option (and that can easily be the case if you picked the wrong stock).
The only hesitations I have in issuing a blanket statement here is that an earnings report can offer great movements on a stock and can interrupt an intermediate time frame for a trade.
If you want to trade over an earnings announcement...here is the way I do it.
I read up on the company, I buy OTM options, and I position my self properly.
Knowing I could loose the entire premium, I trade small. Last earnings season I was about 60% with this strategy (If I recall properly). You'll notice with most of the stocks that have the best moves, these are not always the best looking charts. They are not the uptrending stocks, bouncing off support, forming a price pattern, etc. Technical analysis will need to come in second to the fundamental story. I hate talking fundamentals but Quarterly earnings growth, analyst expectations, and revenue growth will be a few basic things to start with. Message boards occasionally will have good information, but a lot of it is random people trying to influence the opinion of another. I always try to mention that if you are easily swayed in your opinion...do not go this route.
Other vehicles to use for earnings reports are straddles/strangles obviously. It's been a few months since I last wrote about this but here are things I look for...
Volatile stocks
Repetitive earnings gaps
Low IV (read: buy your options EARLY!)
I like getting into these three weeks in advance, minimum. I always trade strangles, never straddles since I hate owning ATM options.
If you get a good run in the stock pre-earnings, you could always exit the trade early with one side of the trade profiting from directional movement, and the other not suffering such a huge loss thanks to rising IV. Again, the key is getting in early.
I wanted to add more detail, but I am short the time today. I will try to come back and answer questions in the comments, so leave them if you have them.
Recommendation: Trade em' small if you are gonna trade em'
Long: Full Throttle
Short: White Mochas
On all my presentations I have always taken the route to tell a trader to stay away or get out of the trade prior to an earnings announcement. For the newer trader it is not worth the risk in my opinion and normally they are not positioned properly to take a 100% loss on an option (and that can easily be the case if you picked the wrong stock).
The only hesitations I have in issuing a blanket statement here is that an earnings report can offer great movements on a stock and can interrupt an intermediate time frame for a trade.
If you want to trade over an earnings announcement...here is the way I do it.
I read up on the company, I buy OTM options, and I position my self properly.
Knowing I could loose the entire premium, I trade small. Last earnings season I was about 60% with this strategy (If I recall properly). You'll notice with most of the stocks that have the best moves, these are not always the best looking charts. They are not the uptrending stocks, bouncing off support, forming a price pattern, etc. Technical analysis will need to come in second to the fundamental story. I hate talking fundamentals but Quarterly earnings growth, analyst expectations, and revenue growth will be a few basic things to start with. Message boards occasionally will have good information, but a lot of it is random people trying to influence the opinion of another. I always try to mention that if you are easily swayed in your opinion...do not go this route.
Other vehicles to use for earnings reports are straddles/strangles obviously. It's been a few months since I last wrote about this but here are things I look for...
Volatile stocks
Repetitive earnings gaps
Low IV (read: buy your options EARLY!)
I like getting into these three weeks in advance, minimum. I always trade strangles, never straddles since I hate owning ATM options.
If you get a good run in the stock pre-earnings, you could always exit the trade early with one side of the trade profiting from directional movement, and the other not suffering such a huge loss thanks to rising IV. Again, the key is getting in early.
I wanted to add more detail, but I am short the time today. I will try to come back and answer questions in the comments, so leave them if you have them.
Recommendation: Trade em' small if you are gonna trade em'
Long: Full Throttle
Short: White Mochas
My job is really putting a damper on keeping up with to volume of The Blog the past week or two…
Posted by
Anonymous |
4/13/2007 12:05:00 PM
Jeff,
Like the hockey mask..
Posted by
Raimo |
4/13/2007 12:18:00 PM
possible earnings play: IBM,WFMI..they love to gap.
Posted by
Anonymous |
4/13/2007 12:29:00 PM
I hope you are only wearing that mask for Friday the 13th. You look like Hannibal Lechter. I am feeling very creeped out right now.
Posted by
Susan from Manhattan |
4/13/2007 12:36:00 PM
Short White Mochas? Wow.
Anyway, great timing on the post Jeff. I've taken 2 shots this week on plays I will hold through earnings. BTU and EBAY. Both recent breakouts of long-term patterns, both intermediate-term options plays. Both small position sizes.
Posted by
Anonymous |
4/13/2007 01:00:00 PM
Lois,
Thanks for CCJ. Took the May 50 just before the close and have already covered the spread.
Earnings in 2 weeks though!
RD
Posted by
Anonymous |
4/13/2007 02:00:00 PM
I am with you on the BTU trade Brett.
CAL - how about drawing a trend line from March 06, MAY 06 JULY 06... this puts the stock right at resistance now. Could be low risk earnings play to the down side, June 35 PUTs are only 95 cents. That H&S could still play itself out!
Posted by
dbohntr |
4/13/2007 02:03:00 PM
Jeff,
Thanks for the opportunity to discuss this topic of earnings. I hope that more people will keep this thread going even though you've posted newer ones.
IIG - typically a short squeeze comes after earnings, doesn't it? I'm trying to determine the best exit point. I admit to not having done that before getting into this trade simply because of the nice support formed and obvious bounce.
ATI - I'm 150% up on this one with an April expiration-before earnings announcement. Do I hold it up until last day because the closer we get to earnings the more IV will help me out and diminish the time decay factor???
Gary
Boston
Posted by
Gary D |
4/14/2007 06:07:00 AM
Gary,
A short squeeze does not have to come after earnings. It is a process and not a specific event. A huge earnings surprise might spark investors to try and squeeze out the short positions, but any upward price movement could cause this to happen.
Posted by
Option Addict |
4/14/2007 11:16:00 AM
Jeff,
I think you have described using options expiring 2 months out on earnings strangles. Can you clarify for me, using current data on WFMI as an example?
Earnings: 5/9
4/13 close: $44.34
Current IV: 0.37
High IV before last earnings: 0.46
May 50/40 strangle: $0.94
Jun 50/40 strangle: not available
Aug 50/40 strangle: $3.02
Since June doesn't appear to be available yet it looks like the May options would be the appropriate choice. Would you agree?
If June options were available would you normally prefer June options over May options for this scenario?
Does the low-cost of the May 50/40 strangle make this an attractive trade (provided the position is sized for the possibility of total loss)?
Many thanks,
mike - seattle
Posted by
Mike |
4/15/2007 11:44:00 AM
(continued)
May will have only 7 days till expiration when earnings are announced, so the option prices will be almost entirely intrinsic value, meaning there is almost no time value for IV to act on. I think I would want the options expiring one month out from earnings (i.e., June) so there is still time-value for IV to influence at the time earnings is announced, right?
mike - seattle
Posted by
Mike |
4/15/2007 05:32:00 PM