Earnings: To Trade or Not to Trade
Apr 11, 2016
Earnings season for Q1 2016 begins today, when Alcoa (AA) announces. Why Alcoa? We have no idea, but when AA announces, that is when earnings season is said to begin. Each quarter, we receive a number of questions about earnings, especially when earnings season starts. In this piece, we’ll discuss under what circumstances we trade earnings, as well as the mechanics for trading earnings.
Corporate earnings are almost always announced either after markets close for the day or just before markets reopen. It is rare that earnings are announced during the trading day.
Earnings trades are a great way to generate market engagement. At tastylive, we tend to trade earnings when market volatility is low and premium selling opportunities are scarce. The uncertainty about what the price of the stock might do when earnings are announced increases the implied volatility before earnings.
We use options that expire just after the earnings announcement, which can include weekly options. They tend to experience the greatest increases and subsequent collapses in volatility. That is key for trading earnings.
Whoa, whoa, whoa there, Sparky. Direction? Okay, sometimes we (and by, “we”, I mean, Tom) take a stab at direction, but for the most part, we stay neutral. Trading earnings is not about guessing direction.
Earnings trades are about the volatility crush following the announcement. While we want to know what the expected move is so we can place our trades around it, we are not trying to predict direction. We don’t know whether a stock is going to move up, down or sideways, but we do know premium will come out when volatility collapses.
We use the same short option strategies to trade earnings that we would in any other trade.
The biggest difference between an earnings trade and our regular trades is the amount of time we are in the trade.
We want to limit market exposure when trading earnings. Typically, volatility will rise as an earnings announcement nears. Getting into a trade too far in advance likely means our trade will go against us as premium gets pumped in. Therefore, we like to enter an earnings trade sometime in the afternoon on the day earnings will be announced.
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.