Earnings Plays are trades we do on stocks that are set to report their quarterly earnings. This is a binary event that typically causes premium to increase prior to the event. We look to sell premium just before the event with expiration dates shortly after the event. For example, we sold an Iron Condor in JPM[hyperlink] on a Thursday near the close of the market since JPM was reporting earnings Friday before the market opened. Once the market opened Friday we closed out our trade. In this case, it was for a profit but we usually take what the market gives us and move on.
A typical earnings trade is an Iron Condor. We determine the expected move and then sell the call and put strikes right at that move. To determine the expected move we first determine how much the the condition where an option price exactly matches the current strike price... straddle costs. We add/subtract that amount to the underlying’s current price to give us the range of the expected move. For the wings we let the pricing and strikes available determine that but try to keep it no more than 3 wide.
These are quick trades and we don’t typically defend losers. We do these trades with a defined risk so we know exactly how much our max loss will be.
A couple of issues to be aware of on earnings plays:
- Liquidity. We want very liquid options so we can get good fills and get out of the trade when the time comes.
- Stay small. These are binary event trades. We try to keep the odds in our favor but there will be full losers. It is not a matter of if but when (see our 1/26/18 INTC trade[hyperlink]). We are prepared to lose the max on each trade. We will win more than we lose so want to keep the losses manageable.
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Welcome to this week’s edition of the Traders Trading Weekly. Each Monday we update you on trades we are looking at for the upcoming week.
Today ends the first market week of April. It was a strong week that traded well into the close at 2892.74 for the S&P. Where it goes from here will be interesting.
I used to keep an eye on this one because my boys are in their teens and I see how they like to play video games. However, Fortnite had a huge effect on this stock and its competitors because of their free model.