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.
Define your 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:
- Does implied volatility change?
- Leading into the event, does the stock typically selloff or get bid up?
- Is there a certain sector that gets a boost?
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.
Coming up with your own trades
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.