Calm Your Earnings Season Fears With Weekly Options Trading

Do you know anyone on the board of Apple, or Google, or Microsoft?

Do you know anyone that’s even high up in those companies? If you do, add a comment to this post right away and let us know. But chances are you don’t and so earning season for a lot of stocks is going to come with a lot of volatility.

Volatility about future projections, past performance, pricing and product selection. So much volatility that it can undoubtedly be one of the most fearful times of the year for investors.

So how can you use options to take advantage of earnings season and calm your fears with hedging? Well I like to use weekly options.

The Growing Popularity of Weekly Options

Weekly options have been growing in popularity because of their short-term hedge, in lieu of a contract that’s more expensive and requires more time. These traditional monthly contracts, while great, don’t offer any real advantages over weekly options when we talk about earnings season and hedging.

You see, with monthly contracts you have to buy and hold for possibly two to three weeks before the earning report even happens. Sure you could buy the contract the week before, but if you want to get a true hedge, then you’ll actually have to buy the contract well in advance of the actual report. This is because companies may actually trade much more before the report of the earnings then they will after.

An Uncommon, But Classic Earnings Example

It’s not uncommon for companies like Google, pictured below, to actually have stellar earnings, earnings that knock the ball out of the park and yet they gap lower on earnings because it had already been priced in.

In fact in Google’s case above, the earnings were priced in and then some before the announcement. Google beat earnings estimates but analysts had come to expect even more and as a result the stock sold off for the next week.

The point here is that you really never know what will happen after earnings are announced. Even good earnings can still make investors run for the exits.

What Strategies Should You Use?

Well there are two strategies that I typically like to use with weekly options; strangle or straddle.

With these strategies you’re going to be buying two contracts, both a call and a put. And that’s going to give you protection on both sides of the announcement whether the stock rallies dramatically, or whether the stock tanks after the announcement.

The only difference between them is that you’ll be either buying the same strike price, or separating out your strikes a little bit. But this is a great way to add a non-directional hedge that will completely calm your earnings fears right before the announcement.

What Do You Do AFTER Earnings?

Well after you know the news has come out, whether the market has moved up or down or not even moved at all, you have to realize that this has all been a hedge and it’s time to get out of the position.

It’s over, it’s done, you’re not playing this as a speculated bet, so get out of your weekly options before they decay in value to the point at which they’re not worth anything.

Hopefully you’ve made money, but again, if you haven’t take what money you put into the market as a hedge and realize that you could have lost a lot more if you didn’t have this hedge all! Better to be safe than sorry right.

Have You Used Weekly Options As A Hedge?

Add your comments below and let me know how you used weekly options around earnings season. Do you speculate on stock movement?

Do you only use the put side, or do you use as a strategy like the straddle and strangle that I mentioned above. Again, add your comments to this post and let us know your thoughts.

  • Joseph

    Hi Kirk,

    I like the strategy knowing how much an equity moves after earnings, however do we have to worry about being negative theta and more importantly the vol crush after the announcement?

    • Kirk

      Yes you would be negative vol but the idea is more that you hedge your stock position and hopefully for only a few days. Still you have to have some risk involved being long but hedged.

  • Stan

    Kirk,
    Why not trade for example RUT, SPX, or QQQ
    so that you do not have to worry about earnings?
    Do you plan to start trading weeklys?

    • Kirk

      You could of course trade the bigger indexes but this was for those that trade single stocks and have a large un-hedged position.

    • Bill

      Have been playing the Rut weeklys alot, and like to get some feedback as to whether you close your positions before close on Thursday or let them expire?

  • Bill Place

    Yes, use this, however out before earnings

  • Brian

    You can looks at credit for ATM straddle to give you ideas of market expected move is for that stock(ie $25point credit for say apple ATM straddle means market makers expect $25 pt move. Then look at past earnings reports for that stock to give you idea of historical earnings move. If credit is extra high vs historical move then might be better to get credit vs debit. Also in low volatility if hi beta stock is coming into earnings and bullish chart you could go long an out money call option a1-2 weeks prior earnings and get volatility spike in premium and close it before earnings when options have highest volitility in the premiums.

  • Theo

    Kirk, I play weekly options every week. But I especially love to play weekly options during Earning (E)Season. Fav strategies for E season: Iron Condors (when E date is Wed or Thur b4 exp day), Double Calenders, Butterflys & Straddles/Strangles (using vertical spreads instead).

    Case in point: GOOG & ISRG E release were Thur (7/19), after hours. GOOG was @ 597 on Thurs. Expected E move +/- 30pts. GOOG didn’t move much with Q1 E. I put on a Iron Condor 570/630 short strikes for $2.20 credit/2.80margin. GOOG had good E. Opened Fri @ 608 well within my IC range. IV tanks. Bot back the IC @ .40 debit. Made $1,80 profit / 2.80 margin = 64% overnite ROI.

    Thurs,ISRG @ 546. ISRG has a history of making 30-50pt moves on E release. I straddled the stock with a call/put vertical spreads. Total debit 6.10 (cheaper than reg strangle – $26+). Short strikes. 520 & 570. Needed a +/- 25pt to max out the next day – exp Fri. E came out. ISRG took a big hit. On Fri, close put spread @ $9.90 ($3.80 profit / 62% ROI) when stock was @ 499.

    Can’t wait for next week E releases => AAPL – AMZN- BIDU – FB – NFLX :)