I took the week off last week and am now back.
Hope you didn’t miss me too much.
Did I do anything exciting? Not really, just
trying to refine my approach to trading earnings.
You see, I have been working with one of my members
for quite sometime now when it comes to earnings.
We have diagnosed and tracked everything we could
to try and determine a directional bias off earnings.
Everything from insider activity to option activity.
And quite frankly, there really is nothing that can give
you a decent clue as to what side of the market you
want to be on BEFORE an earnings annoucement.
I know what you are thinking. Why not just buy
a straddle or strangle before earnings?
There is s simple reason why this not work.
It’s called implied volatility. You see the market makers
increase the implied volaility before an earnings
Implied volatility is one of the major factors when
it comes to option pricing.
So, if the implied volatility increases, the cost for the
options also increase.
If you add up the cost of the at the money put and call
the total will give you the estimated move that the
market is expecting.
If you bought a straddle and it exceeded that move, you
But if it does not move that amount, you will no doubt
This is because just after the earnings are announced,
the impied volatility will drop. It will come back to
the norm. Call it the volatility crush.
So, even if the stock moved the projected amount, you
will lose money.
You really need a move above the expect move to
make money on a straddle before earnings.
Don’t get me wrong. If you had a decent way to
‘predict’ how a stock would trade before their
earnings, the profits could be oustanding.
For example, on LNKD’s last earnings report on
April 30th, the stock dropped $46.83. This caused
the $252.50 put to go from $11.10 before the
announcement to $47.10 after it.
That is a 324% profit overnight.
Or how about BIDU, which reported the day before
LNKD, on April 29th.
When BIDU dropped $18.42 off their earnings, the
$217.50 put went from $5.55 to $17.25.
That is a 210% gain overnight.
Now you can see why we have searched for the
elusive directional bias. The profits can be massive.
And it is a one day trade.
Instead of focusing on placing a trade before the
earnings announcement, trading after the earnings
can be just as profitable. Or even more profitable.
You see there seems to be a few set ups that occur
after earnings that become routinely predictable.
And you are not buying inflated options.
How profitable you ask?
Let’s take a company that reported last Thursday,
MNST gapped down off their earnings Friday morning.
There were two shortside swings. On the first swing,
the $133 put went from $.50 to $5.00. That is a 10 bagger.
On the second swing, the same $133 put went from
$1 to $4.40. Still a return of over 300%.
These returns are possible because the options I mentioned
expired that afternoon. In other words, you were not
paying a lot for time premium. And the implied volatility
that existed before the announcement now dissapeared.
Now here is the thing.
Today, MNST jumped up and had a swing of almost $10
this morning. The affect was that this week’s $130 call
went from a low of $1.25 to a high of $8.70 today.
That was a return of almost 600%. And it hit the high for
day by 11:00 EST. In other words, you would have booked
your profits in an hour and half after the open.
The question is was there anything to suggest you should
have owned calls?
And yes, there was a set up based on Friday’s price action
that suggested it was the thing to do.
This is what I mean about these moves being somewhat
I am thinking about holding a webinar to share this information.
Best of success in the markets.