What are these so called earnings plays

on 2018.01.26

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 at the money 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:

  1. Liquidity. We want very liquid options so we can get good fills and get out of the trade when the time comes.
  2. 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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