The Smart Ways To Play Earnings

Hey Traders,

Earnings season is kicking off with big banks starting to report tomorrow, and things get really rolling early next week …

And as usual, everyone’s trying to find the best ways to profit from earnings … sometimes it seems like trading earnings season is like being in one of those money booths, with dollar bills swirling in the air, just waiting for you to grab them …

Unfortunately, some rookies will get taken time and time again because they’ve simply timed their trades wrong.

Lucky for you, you’re with Option Pit, so you’re already lightyears ahead of the average trader.

You can bet your bottom dollar (well, don’t do that) that we’ll be playing earnings for all their worth.

And here’s a few of the key things to keep in mind while doing it.

Before Or After, But Not During

You may have heard the saying “buy the rumor, sell the news.”

And I find this to be especially relevant when it comes to earnings.

I know it can be especially tempting to trade into earnings … volatility is (usually) rockin’, and many times, you think you have a pretty good idea which way earnings are going to go … so why wouldn’t you try to capitalize, right?!

Not so fast. Here’s the thing.

Even when you “know” how the earnings report is going to go … you don’t know how investors will react to it, and there’s really no way of telling which way the stock is actually going to move.

I mean, let’s take a look at Apple (Ticker: AAPL).

Ahead of AAPL’s last two earnings calls (January 27, 2021 and April 28, 2021) the shares were on a hot streak … coming off of big uptrends, volume looking solid, and strong earnings expected (gee, sound familiar?) …

And you know what? AAPL delivered, beating anticipated earnings per share (EPS) by $0.27 and $0.41 respectively, and posted record revenues and substantial year-over-year increases!

But … look at what the shares did:

Chart courtesy StockCharts

Apple shares sold off after these outstanding earnings reports, with heavy selling volume weighing the shares down for days.

“Okay, so, bet on a post-earnings plunge for AAPL. Got it.”

The thing is … that isn’t always the case. Over the last eight quarters, AAPL has seen a post-earnings move higher four times, and a post-earnings move lower four times.

And the median post-earnings move is 2.2% in the session following earnings, but the largest move was a 10% swing higher, and the smallest move was just 0.1% lower. Quite a range there.

What’s more, headed into earnings, AAPL’s expected volatility usually indicates a significantly larger move in store than what actually comes to fruition, meaning you’re likely overpaying for options.

Holding through earnings can also put you at risk for getting caught in a volatility crush – when the IV of options plunges after an event. Ahead of earnings, there’s usually more IV than usual priced into options, given that earnings reports can lead to big post-report moves.

But after earnings, people aren’t expecting a big swing anymore (they assume the news is already priced into the shares), so option prices drop.

“Buy high, sell low” is not a trading strategy you want to take in this case!

However … post-earnings low vol does present some opportunities …

With volatility oversold pre-earnings, and the subsequent post-earnings vol drop, after earnings can be a great time to pick up some options on the cheap.

Or, on the flip side, if you can anticipate the rising volatility going into earnings, you can also use that to your advantage – such as selling options for a high premium, or opening spreads.

Again, there’s significant risk to any trade around earnings, and personally, I like to be completely out of any of my positions ahead of an earnings announcement. I just find there to be too much risk and uncertainty to make it worthwhile.

But that doesn’t mean I won’t be playing earnings season for all it’s worth … I’m just going to be smarter about it, and not take on unnecessary risk.

If you’re interested in joining me, my Sharp BETS program is pretty much perfect for earnings season. The trades are based on Background (the story behind the stock, and the catalyst for the trade), Energy (volatility powering the trade), Timing (when the trade should be executed) and Strike (the best strike to play). You can click here to join just in time for earnings season

Or you can always check out some of our trades after the fact on our Trading Records page … but that’s not quite as much fun (and not as profitable!).

Trade smart out there, and let’s make some money this earnings season!

Your Only Option,

Mark Sebastian


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.