Trading through earnings is basically gambling.
But what if I told you there are setups around events like earnings…
However, instead of guessing which way the stock goes after the event…
…you create a trade leading into it!
This is one of the coolest tricks in my bag of tricks.
If you’ve got some common sense, then it’s simple to learn.
In fact, I applied it yesterday and turned a profit in call options leading up to Netflix’s (NFLX) earnings announcement.
*Please see disclaimer below
Of course, not all trades will be winners.
But I’ve used this setup countless times and have scored significant profits off it…
…enough to know it works.
Allow me to share with you how it all works.
When most people talk about event-based trading, they’re interested in something like earnings, hoping to profit off the directional move after the event.
As an options trader, let me explain why that’s extremely difficult.
Known events like earnings drive up implied volatility. Think of implied volatility as ‘uncertainty.’ Higher IV means that traders are buying options (protection) against the unknown.
That means option prices get more and more expensive all the way into earnings.
But once earnings hits, that uncertainty disappears. Investors know what’s out there and can make decisions accordingly.
When you trade through an event with long options trades, you’re betting that you get the direction correct AND that it moves enough to offset both time decay and the contraction in implied volatility.
That’s a pretty tough ask.
Instead, why not trade with what is highly probable to happen?
If implied volatility increases leading into earnings, why not buy an option leading into earnings and release it before the announcement?
Sounds crazy, I know.
But, that gets the natural increase in implied volatility working for you instead of against you.
Here’s a look at how it plays out in Netflix each earnings cycle.
NFLX Daily Chart With Implied Volatility
Every single time, implied volatility rises into earnings for Netflix and then flops out immediately after.
But this applies to more than just earnings. It’s all about a logical story built around the event.
First thing’s first. You need to figure out what your event is. It can be a Fed announcement, earnings, or even options expiration.
Whatever it is, you need to know when you want to get out of the trade by.
Next, look at how things react in the past leading into the event. There’s a handful of things you can look at including:
These are just a few ideas of questions to ask and by no means extensive. The goal is to think about how the whole story fits together.
Here’s an interesting example.
Options expiration week often sees stocks pinned to specific prices – where markets try to hit expiration at that price. Doing this gets the most contracts possible to expire worthless, making options desks gobs of money.
But I found a way to turn this into my advantage.
One of my favorite ways to do this is with butterfly spreads. These are low probability trades with low outlays compared to the potential gains.
What makes them low probability is you need to have the stock land at a specific price at a specific time…sound familiar?
I like to look for significant support and resistance levels and trade into them during options expiration week.
By using the tricks of the market against it, I can increase the odds of success on a low probability trade.
The key here is that my trading idea MATCHES what I observed in the markets.
Think you’re ready to come up with your own ideas?
Start by finding a recurring, known event. We can’t predict things like the Coronavirus. But, we do know when earnings are.
Next, look for patterns in the stock or options leading up to that event. See if there are any trends that occur over and over.
I find a trading log and notebook extremely useful to jot down my ideas and observations. It helps both organize and put things in perspective.
Now, if you want to skip ahead and leverage my experience, then you should check out my LottoX service.
Here you’ll get the benefit of my experience, coupled with weekly live training as well as my portfolio streamed to you every day.
It took me 8 years to develop into a consistently profitable trader.
I had blown up trading accounts and swore of trading for good on several occasions during that stretch.
I had no edge, no trading plan, and no strong concept of risk management.
You see, for some folks finding the right trades isn’t too difficult.
What they struggle with is trade management.
They either hold too long (turning a winning trade into a loser)…
…or they are too stubborn to let go of a loser because their ego doesn’t like it.
Before I share with you my strategies to overcoming these issues, allow me to ask you this question:
How many times have you said to yourself – “I’m only going to lose X” on this trade…and you find yourself staring down at a way bigger hit?
Or how about getting into a trade and realizing you don’t know where you planned to stop out?
Then there’s my favorite, getting into a trade because you need to win back what you just lost.
You’re not alone!
It’s not something you can change overnight.
But with some practice and a different mindset, you can get things headed in the right direction.
Quite often, I talk about the relationship between risk and reward with LottoX members. It’s one of the main reasons I turn a profit even with a win-rate of 50%.
Consider the flipping of a coin. Each side has a 50% chance of coming up. If I can get someone to pay me slightly more than I would lose for each guess, I’ll make money on the long run.
Now, think about how this works in trading.
Check out this chart of Restoration Hardware (RH).
RH Hourly Chart
Let’s assume for a minute that I want to take a long trade on a retracement of the big breakout candle noted by the blue arrow. My target would be above the high at $275.63. My stop would be down at $256.53.
The closer I get my entry to the stop, the lower my risk. But, at the same time, my reward goes up proportionally.
What I trade off is the probability of success or missing the trade entirely.
Now, this is where a trading journal comes in handy, something I talk about extensively with LottoX members.
Assume I log a bunch of trades just like this one in RH.
Reviewing my log, I see a 75% retracement of the candle (kind of like entering around $263) has the same win-rate as if I would enter at a 25% retracement (like an entry of $267).
The only difference is that I miss more trades waiting for the deeper retracement.
If that’s the case, I would much rather miss the trades. My experience tells me it’s easier to find other setups or charts rather than trying to force them on one stock.
In fact, trying to force trades is one of the quickest ways to destroy your account.
Humans have some of the oddest behaviors when it comes to losing trades.
See if this sounds like you (this happened to me sooooo many times)…
I find myself at a loss on a trade. Looking at the chart, I decide that the stock is changing trends and this would be a good place to add to the position. I can move my stop to below the most recent low and potentially save the trade.
Next thing I know, the stock blows past those levels and I’m staring down a huge loss and can’t think how to react.
Freezing up at times like these is really common. So is overanalyzing and trying to rationalize your way back to a smaller loss.
Stopping out of a trade is a skill, one that requires practice!
We are not robots. Emotions play a large role in how we interact with our environment. Even algorithms are influenced by our state of mind when we program them.
Get used to losing.
It doesn’t have to be a horrible experience.
Losing is part of trading. If you can’t accept that, you’ll struggle mightily to succeed.
Find comfort with it and understand it’s a part of trading.
I’m not saying you should feel nothing. But recognize that your feelings are just a reaction. They’ll go away eventually. Only when you give into them will they stick around.
In the same vane, learn to take breaks.
Everyone burns out at some point, even on the most enjoyable activities.
Stepping back from the charts and focusing on something entirely unrelated refreshes the mind, helping us see things a little more clearly.
Fool me once, shame on you, fool me twice shame on me. Fool me 85 times and I need to reevaluate my strategy.
Not every strategy works out. I went through several before I landed on my TPS setup.
It takes practice to recognize what’s a losing trade and a losing strategy.
Journals are invaluable tools to uncovering the truth. You can review the trades and see how they lay out over time.
Look, I know it isn’t easy.
That’s why I created my LottoX service – to help folks learn the ins and outs of trading and strategy development.
With live weekly training and my portfolio streamed live during market hours, you’ll get an inside look at how I trade the markets each and every day.
Option trades create some of the most impressive gains.
That power comes from an options’ leverage.
And my favorite way to take advantage of that fact…Finding Explosive Moves!
Which is what my top three trade ideas this week are all about.
One method I teach my LottoX members – playing the short squeeze.
Short squeezes occur when too many traders sell a stock short, betting against shares.
That builds energy like a storm, releasing in explosive moves.
And if I play the setups just right…I just might be able to catch a ride.
I wouldn’t classify Carvana as a stay-at-home trade. But it certainly falls into the momentum category.
When I look at their business, I can’t help but think of them as giant car vending machines. Yet, I know a few people who used them and enjoyed the experience.
What I’d enjoy more is if this TPS Setup pushes off to new highs.
Let’s take a look at the chart.
CVNA 78-Minute Chart
Here we’ve got a classic TPS setup, which contains three key elements.
Now, one thing you’ll see at the bottom in the white box are the red dots (squeeze) and a histogram. The dark bars signify waning bullish momentum. I’d like to see that turn light blue, meaning a rise in bullish activity.
However, it’s at a great entry point between the 8-period and 21-period exponential moving averages.
With this being the 78-minute chart, I’d expect this trade to finish in 3-5 days.
As I explain to LottoX members, the stop isn’t always a hard, fast place. I look for either the squeeze to fire, a break in the pattern, or some other move that signifies bears regaining the upper hand.
Lastly, I want to point out that this stock has 31% short-interest, meaning nearly a third of the shares available for trading are currently sold short. That can lead to explosive moves from margin calls during what’s known as a ‘short squeeze.’
As one of the largest trucking carriers in the U.S. you would think I might have traded them before. Yet, I can’t think of it ever happening.
There’s a first time for everything!
What attracted me to this stock initially was the 25% short float, which I mentioned can lead to a short squeeze.
Once I looked at the chart, I found my TPS setup waiting for me.
KNX 78-Minute Chart
This TPS setup is pretty easy to spot. With a swift (pun intended) move upwards, bulls established their dominance. As it traded sideways, it found support on the 21-period exponential moving average.
During that time, it created a beautiful consolidation pattern (nicer than CVNA’s).
However, even with the squeeze (red dots at the bottom), I still see dark blue bars representing declining momentum.
Because price is near the lower end, I would be ok with starting to scale in here since I’m so close to risk, even though I typically wait for momentum to turn.
Being so close to risk (my stop) cuts my potential losses and improves my risk/reward ratio.
Plus, the ‘beaten down’ names like transports and hotels haven’t seen too much love lately. If they get money flowing in, this name could really take off.
Despite Reddit rumors that the company is involved with child smuggling via furniture shipments, Wayfair keeps pushing higher and higher.
Those rumors are untrue by the way.
Yet again, we find another stock with high short flat at 29%.
And yes…another TPS setup.
W 78-Minute Chart
The chart’s pattern may look a little choppy. However, when you draw trendlines (white lines) connecting the tops and bottoms of the candlestick extremes, you start to see how they’re converging. That’s what tells me I have a workable pattern.
It’s all good to talk the talk. But I prefer to walk the walk.
That’s why I detail my trading plans for my LottoX members, host weekly live training sessions, and more.
Give a person a fish and they eat for a day. Teach someone how to trade…well you get the idea.