We’ll also provide some tips on how to pick the right strategy for your trading goals and risk tolerance. So whether you’re looking to make a quick profit or hedge your portfolio against downside risk, read on for the best options strategies to trade during earnings season!
This article was first published on Epsilon Options (now part of SteadyOptions).
The 5 Best Options Strategies for Trading Earnings
If you’re like most investors, you probably get a little anxious when earnings season rolls around. After all, anything can happen when a company reports its quarterly results.
The stock could gap up or down, and you could find yourself on the wrong side of a trade. But there are ways to trade earnings that can take the guesswork out of the equation and even give you a chance to profit no matter which way the stock moves.
Here are five of the best options strategies for trading earnings.
A long straddle is an options strategy that involves buying both a call and a put on the same stock with the same strike price and expiration date. The idea behind a straddle is to profit from a big move in either direction.
If the stock moves a lot, you’ll make money. If it doesn’t move at all, you’ll lose money.
And if it moves just a little bit, you’ll also lose money. So, you really need to have a good handle on where the stock is likely to move in order to trade a straddle successfully.
Here’s more on how to trade straddles into earnings.
A Long Strangle is very similar to a straddle, except that the strike prices of the call and put are not the same.
Instead, the call is usually purchased with a strike price that is lower than the current stock price, and the put is usually purchased with a strike price that is higher than the current stock price.
The idea behind a strangle is to profit from a big move in either direction, just like with a straddle. But because the strike prices are further away from the current stock price, strangles are usually less expensive to trade than straddles.
3. Put Ratio Backspread
A put ratio backspread is a bearish options strategy that involves buying puts and selling more puts at a lower strike price. The idea behind this strategy is to profit from a big move down in the stock price.
The put ratio backspread can be profitable even if the stock doesn’t move as much as you expect. That’s because you’re selling puts at a lower strike price, which means you’ll keep the premium even if the stock doesn’t move as much as you hoped.
4. Call Ratio Backspread
A call ratio backspread is the mirror image of a put ratio backspread. It’s a bullish strategy that involves buying calls and selling more calls at a higher strike price.
The idea behind this strategy is to profit from a big move up in the stock price. Like the put ratio backspread, the call ratio backspread can be profitable even if the stock doesn’t move as much as you expect.
That’s because you’re selling calls at a higher strike price, which means you’ll keep the premium even if the stock doesn’t move as much as you hoped.
5. Iron Condor
An iron condor is an options strategy that involves buying and selling both calls and puts. The idea behind this strategy is to profit from a stock that doesn’t move much at all.
Iron condors are usually traded with the expectation that the stock will stay within a certain range. If the stock does move outside of that range, then the trade will start to lose money.
Of course, there are no guarantees when it comes to trading earnings. But these five options strategies can help you navigate the waters and even profit no matter which way the stock moves.
How We Ranked the Earnings Strategies
But did you know that there are different ways to trade earnings?
And that some strategies are better than others?
We’ll discuss what earnings are and how they can impact stock prices. We’ll also touch on the different types of earnings releases and how to trade them.
Earnings are the financial reports that public companies release on a quarterly basis. They include information such as revenue, expenses, and profits.
Investors use earnings to gauge a company’s financial health and to make decisions about whether or not to buy or sell the stock.
There are two types of earnings releases:
Positive and negative. Positive earnings releases usually result in a stock price increase, while negative earnings releases usually result in a stock price decrease.
The best options strategy to trade a positive earnings release is to buy call options. This strategy allows you to profit from a stock price increase with limited downside risk.
The best options strategy to trade a negative earnings release is to buy put options. This strategy allows you to profit from a stock price decrease with limited downside risk.
If you’re not sure which strategy to use, you can always hedge your bets by buying both call and put options. This way, you’ll make money if the stock price goes up or down.
Whichever strategy you choose, make sure you do your homework before earnings season. This way, you’ll be prepared to make the best possible trade.
Key Takeaway: Earnings are important to stock prices and there are different ways to trade them. Some strategies are better than others.
Number One: Buy Straddles Before an Earnings Announcement
If you’re looking to take advantage of an earnings announcement, buying a straddle is one of the best options strategies out there.
By buying a straddle, you’re essentially buying a call and a put at the same time, giving you the potential to profit no matter which way the stock price moves.
There are a few things to keep in mind when trading earnings announcements. First, make sure you know when the announcement is scheduled.
Second, be aware of the potential for increased volatility around the announcement. And finally, have a plan in place for how you’ll trade the announcement.
The safest strategy would be to exit the straddle before the earnings are out to avoid the IV Crush. If you hold the straddle through earnings, and the stock doesn't move enough, the losses can be significant.
Number Two: Sell calls on Overpriced Stocks Post-Earnings Announcement
By “overpriced” we mean stocks that are trading at prices that are significantly higher than their intrinsic value.
And by “intrinsic value” we mean the true underlying value of the company, as determined by factors like its earnings, cash flow, and assets.
The reason this strategy can be profitable is because when a stock is overpriced, there is a greater chance that it will fall after its earnings are announced.
And if you sell a call on a stock, you’re essentially betting that the stock will not increase above a certain price.
So, if the stock does fall after earnings are announced, you could profit from the difference between the strike price of the call and the new, lower price of the stock.
Of course, this strategy is not without risk. If the stock doesn’t fall after earnings are announced, the short calls will lose money.
Therefore, it’s important to do your homework before selling calls on overpriced stocks. You need to make sure that the stock is truly overpriced and that there is a good chance that it will fall after earnings are announced.
If you’re looking for a way to profit from earnings announcements, selling calls on overpriced stocks is one strategy you might consider.
Key Takeaway: Selling puts on overpriced stocks can be profitable if the stock falls after earnings are announced.
Number Three: Get Long a Stock Prior to its Earning Release
This way, you’ll be able to benefit from any upside that may occur from the release.
There are a few things that you need to be aware of before getting long a stock prior to its earnings release. First, you need to make sure that the stock is in a good position to benefit from the release.
This means that the stock should be in a strong uptrend leading up to the release. Second, you need to be aware of the potential downside risk that comes with getting long a stock prior to its earnings release.
This is because the stock could potentially gap down after the release if the results are not as positive as expected. Lastly, you need to have a plan in place in case the stock does gap down after the release.
This way, you’ll know how to exit the position if things don’t go as planned. Overall, getting long a stock prior to its earnings release is a great way to benefit from the release.
Just be sure to keep the potential risks in mind so that you can exit the position if needed.
Each of these strategies has the potential to make quick profits or hedge against downside risk. So pick the strategy that best fits your trading goals and risk tolerance!
If you’re looking for options trading education, SteadyOptions is the perfect place to start. We offer a variety of free resources as well as paid trading services that can help you learn about options trading and how to make money from it. Whether you’re a beginner or an experienced trader, we have something for everyone. So what are you waiting for? Check us out today!
About the Author: Chris Young has a mathematics degree and 18 years finance experience. Chris is British by background but has worked in the US and lately in Australia. His interest in options was first aroused by the ‘Trading Options’ section of the Financial Times (of London). He decided to bring this knowledge to a wider audience and founded Epsilon Options in 2012.
- Long Straddle Options Strategy: The Ultimate Guide
- How We Trade Straddle Option Strategy
- Buying Premium Prior To Earnings - Does It Work?
- Can We Profit From Volatility Expansion Into Earnings?
- Trading Earnings: The Myths And The Reality
- How We Trade Calendar Spreads