Top Earnings Options Plays for the Week (4/04 – 4/08) - Cabot Wealth Network

Top Earnings Options Plays for the Week (4/04 – 4/08)

SPY-bear-call-spread-april-13

In my opinion, next week offers little in the way of opportunities around earnings, mostly due to the lack of liquidity in the stocks offered. But that’s okay! The following week marks the onset of another earnings cycle as the big banks are due to announce. I’ll be covering quite a few opportunities as we move towards the week starting April 11. Stay tuned!

That being said, if you do decide to trade one of the stocks listed below, I would suggest treading lightly as the liquidity in the issues below is questionable. And the stocks that offer highly liquid options are low-priced stocks, so the premium just isn’t there. But that’s okay. We’ve had an incredible run over the past several weeks, so holding out a week to prepare for the beginning of another round of earnings might be the prudent move anyway.

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As I say each week, taking the conservative approach continues to be the consistent and profitable way to approach high-probability earnings trades. Those that aim for selling inflated premium first by choosing stocks with a higher implied volatility, hence an inherently more volatile stock, will hit the occasional winner but will ultimately fail over the long term. Use the expected move to your advantage. Don’t think you know more than the market. Remember, it’s all about allowing the Law of Large Numbers to work for you.

Risk management is the key to successfully trade earnings. Get in, get out, move on. In almost every case, adjusting is a frivolous task and only leads to additional losses. Allow the Law of Large Numbers to work in your favor by simply keeping your position size at reasonable levels (1% to 5%), which allows you to endure bouts of sequence risk. Moreover, understand that more trades do not equate to more profits. Be patient. Allow the opportunities to present themselves, then take action by applying an options selling strategy that allows you to have a high probability of success. Understand that you might only have 1-3 real opportunities each week.

Here are a few other top earnings options plays for next week (4/04 to 4/08):

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Courtesy of Slope of Hope

Due to the uncertainty around earnings announcements, both speculators and hedgers create a huge demand for options around a company’s earnings announcement. This increase in demand for the options for that stock increases the implied volatility, which ultimately increases the price of the options.

Basically, options prices are inflated around earnings announcements, and as sellers of options our goal is to take advantage of these price discrepancies.

We can always create a trade with a nice probability of success using a variety of options selling strategies. At the top of the food chain would be the undefined-risk options strategy known as the short strangle. Of course, if you wish to use a risk-defined trade, check out the price of an iron condor at various strike widths. I normally use short strangles or iron condors outside of the expected move and with a probability of success typically above 80%.

The reason I go outside of the expected move or range is because we know through extensive research that 80% of stocks trade within their expected move immediately following earnings.

Again, if you have any questions, please feel free to email me or post your question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.

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