Earnings Trades

This will be another options trading thread, will cover earnings trades that I do regularly. Most any options trader knows what this means, but I'll offer the following in explanation.

All publicly traded companies are required to issue earnings reports quarterly. These earnings releases (ER) are scheduled events, with the date/approx time for each ER known weeks/months in advance. For instance, AAPL will have an ER on Feb01, after regular trading hours.

For options traders, these scheduled ERs are special, recurring opportunities. Because options implied volatilities predictably rise into the ER dates, and then predictably crash thereafter. In trading, Predictability = $$$.

Trading ERs with options is very popular and there alot of different strategies that traders use to capitalize on the iv rush, the iv crush, and also the potential large moves in the stock price that may occur after the ER.

Note the MSFT daily chart: the blue & red balls show the ER dates. Note the IV chart, showing gradual rise in IV up to the ER date and the sudden drop in IV right after the ER.

MSFT has next ER scheduled 1/23/2023...note the the comparatively elevated IV for the weekly MSFT options with the Jan26 expiry. Showing 28.07% now. Based on the chart of IV, we can expect this to increase to 35% +/- by the ER date. I usually look for at least 5%. Some names will offer much more. Nothing is guaranteed, though.

We are 4-5 weeks out from the heart of Q4 earnings season. That's good though, that's where I look to buy time spreads (calendars or diagonals) at low iv, with an expectation of increasing iv into the ER date. I'll be looking for good ER names to shoot at from a month out. I almost always trade AAPL, can usually get good iv rush and sometimes really big moves. The double calendar shown below will catch the iv rush into earnings week and I'll look to take the trade off 1-3 days before the ER, depending on where the stock price is.

I add the cheap fotm verts in the following week to cut the calendar tail risk and to also maybe catch a big move off the ER. I know from the PL curves it seems this is a trade that can not lose money. If you get decent IV rush, that's right... I'll be looking for 10-20 other names to shoot at for Q4 ERs.

META @ 1/31 looks good, could get 15-20% iv rise....

Great strategy! I like that you are avoiding the gamble on the actual earnings release. Very smart.

well it kind of depends on how things look in the days before the ER. If price is static, in the middle of the double calendar, I'll be a little more likely to let the trade run thru the ER. Or if there is no significant iv increase - that's one drawback of the approach. There's no guarantee you'll get a good iv rush, in which case you'll be eating a lot of theta loss by the time the ER arrives. Past performance is no guarantee of etc etc. But, with iv's scraping bottom after recent long bull run, calendars in choice names will be cheap, knock on wood.

CSCO @ 2/14/2024 ... maybe 15-20% iv rise. expected move $3.50

Abbott Labs....meh....some things look ok, but I might rule them out unless they have good liquidity in the options. Profit can be low with this setup & I don't want to be in a hole from the wide spreads...

GOOGL Feb01

I was thinking about that. Wanted to ask you how far out you typically set the expiration?

Typically, the short leg of the calendar or diagonal is set in the ER week, and the long leg is in thee following week. (I rarely trade these setups on a name that only has monthlies.) I am looking for elevated iv in the ER week - that will mean that the sale of the front week option will cover more of the cost of the back week's. Ideally, the iv difference from front to back is great enough that the calendar debit will be very small - 20c or so....

Bot AAPL Feb02/09 $205 calendar calls for 10c, may add more if there's a drop this week.

...Added GOOGL Feb02/09 $130/$150 dbl calendar for about $0.57 net debit

QCOMM looks good, $10 is the exmove for Feb02, 1/31 is the ER

I had GOOGL Feb2/9 $130 puts / $150 calls double calendar, in the whole thing for about 55c. I took off the calls at 55c today. Leaving the puts to run free.....

.....GOOGL looking like a drop early, but I will need a run below $135 to make any money, with the vol crush that's coming

in this AAPL call cldr for earnings, only a 9c debit, I will hold thru earnings, will need >$200 tomorrow to make money....

expected move call fly for AMZN earnings, 18c could give >$2 if it pins the guts on Friday

same idea for AAPL puts, $172.5/175/177.50 for 14c.....looking at META, went calls only, 415/420/425, for 28c

wow META, up near 10%....I'll need it to pull back to <$425 by tomorrow