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Earnings season is in full swing and I’m damn glad to see it.
Back in late November 2017 I decided to do something that had eluded me for my entire trading career: trade earnings announcements.
Now, before I go any further, I must tell you that I’m a conservative options trader by most standards. I truly believe that the more conservative you are with your options strategies the better off you will be over the long term . . . and it’s the long-term that matters.
I use a variety of credit spreads over different time frames. Poor man’s covered calls, covered calls, selling puts, bear call spreads, bull put spreads and iron condors are just to name a few. I believe to be a successful trader it is imperative that you use a variety of options strategies that take advantage of different market scenarios. It is the only true way to diversify your investment and trading approach.
The reason for mentioning this is that back in late 2017 I decided to diversify my trading approach even further. Now, again, I am a conservative options trader. The duration of my trades are roughly 20 to 56 days.
But I decided to add another spice to my trading rack.
This time I wanted to trade earnings. Very few traders have had any long-term success trading earnings. To most it’s a guessing game based on a bunch of estimates that even Wall Street’s finest analysts can’t agree on.
It’s a fool’s game to try to guess the direction of a stock after a company announces.
But thankfully, I’m not a stock trader and I certainly don’t fall prey to the crystal ball approach. Investing doesn’t have to be a trip to the casino.
In fact, I always want to be the casino when I trade . . . because the casino always wins.
And that leads me to the following earnings season strategy. I’ve been using this earnings season strategy over the last 18 months with great success.
The strategy is simple at its core.
The options world gives us a few statistical knowns.
One such known is something called the expected move or expected range.
The expected move is the amount a stock is predicted to move, up or down, by a given expiration date.
For instance, look at Starbucks (SBUX).
The orangish bar in the middle is the expected range of SBUX at expiration. In this case, expiration is in one day . . . and this is important because remember, we are trading around earnings announcements.
So, if we look above, we can see that at the close on expiration day, the market expects SBUX to fall within a range of roughly $74 to $80.25. That’s a range of $6.25. That leads me to the the key statistic that is the foundation of the earnings season strategy:
80% of all moves after earnings fall within the expected move.
Bingo!
Wouldn’t you know it? Starbucks opened up the day after earnings well within the expected range and I was able to book a one-day profit of 15.6%.
This one statistic is the reason why I have managed to be so successful since I introduced the earnings season strategy to subscribers 18 months ago.
But there are several other key screens that are imperative to the earnings trading approach and the strategy itself . . . all of which I will discuss in my upcoming webinar. Click here now.