Strategy For When Earnings Trades Move Against You

Download The "Ultimate" Options Strategy Guide

Earnings trade: Today, I actually am going to change things up. I decided to record this video before the market opens on Friday the 24th, so these are actually the alerts from yesterday. But the reason I want to do it today is because now that we’re through when both of these companies for Microsoft and Pandora have announced earnings, I wanted to do this video this morning instead of last night, so that we can now talk a little bit of strategy heading into today.

And sometimes we can’t do that in the evening because we don't know what the earnings are going to be. Now we definitely know what earnings are going to be for Microsoft and Pandora which are two earnings trades, so I want to talk a little bit of strategy heading into today, so that you guys have an idea of what we can do to adjust these trades.

As always, it's very similar to what we did with Coca-Cola and what we’ve done with all the other earnings trades we have. When the market moves against one side, you’re going to leave that side alone, but roll it out to the next month, that’s the first step, and then move the other side, so the side that the market moved away from, you’re going to move that side closer. We’ll have an idea of how to actually do this today.

Related "Earnings Trade" Resources:

earnings trade

Before we do that, I want to go over just our quick iron condor in EWZ. EWZ is just nothing more than just reloading the gun here and going back to a high implied volatility stock and resetting our boundaries. We had an EWZ trade last month that we made adjustments to and we’re going to go ahead and just do it again.

This is what probability trading is all about, is continuing to make the same types of trades, high probability trades that over time, those probabilities work themselves out. But it doesn't work unless you actually just continue to place these trades. For those of you who thought it might be hard to get back into EWZ, I know I got a bunch of emails saying, “Kirk, we had a losing trade on EWZ last time.”

But we’ve made some good money with EWZ this year, so it's time get back into the game, reload the gun here and get into another iron condor. For EWZ, we got into the 45/46 and the 36/35 put spread. This is a really nice almost $10 wide iron condor and we took in a nice credit $.52, so a very, very good credit for a $1 wide iron condor in EWZ. I’ll go here to the chart of EWZ and you can see it's obviously come back down and implied volatility has come back down for sure, so we should’ve gotten into it a little bit sooner, but it still is up at the 62nd percentile, so implied volatility is still very, very high.

And you can see with our strikes, we’ve got a nice wide base around that iron condor. When I go to the actual profit loss diagram here, you can see just how wide this iron condor is for EWZ. EWZ right now is trading right there at 40.33, so we’ve got good distance on either side. And on this trade, we’re taking about the same amount of risk as our potential profit, so we could make about $200, we could lose about $200, but notice that we’ve got a very wide range that EWZ can trade in. We’re just forcing the market to make a big move in either direction, outside of that one standard deviation area.

Start The FREE Course on “Earnings Trades” Today: When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Click here to view all 10 lessons ?

For the earnings trades, let’s first cover Microsoft. As always with both of these trades, even though you can’t see it today because it’s in the morning, you can go back to some of the videos that we’ve done before and see how we placed these earnings trades, so how we actually go about entering those spreads and what strikes we select.

And of course, you can always sign up for the webinar that we have coming up next Tuesday or this coming Tuesday which is going to be all about earnings trades, but you’ll get a little bit of sneak peek here tonight with these trades. With Microsoft, what we did is we did the 46/47 call spread and the 43/42 put spread. Now, that was just outside of a one standard deviation move and we were able to take in a $.25 credit on those three iron condors.

Now, we did decide to do the weekly contracts because those weekly contracts had good volume. Microsoft is obviously a very big-name stock, it’s highly traded, so I don’t think there’s going to be any issue today being able to roll those contracts to November if we need to. Now, when we actually go to the chart here… And let me go back to the chart. And this is what the chart of the iron condor looks like for Microsoft.

You can see Microsoft was trading right around here yesterday, and then today with earnings currently this morning, it's trading right here. It’s just on the edge of that one standard deviation move which is just incredible. It did actually make a nice move after earnings. It traded up, so now you can see it's starting to test the upper boundary of our iron condor.

The first thing that we’re going to do this morning if Microsoft opens here and we have a little profit or a little gain, we might just close out the whole trade as a scratch. But if it does continue to open much more past our breakeven point, the first thing that we’re going to do is roll this side of the trade out to November. This is our call spread that is the 46/47.

We’re going to roll that out to November, but keep the exact same strikes. You’re not going to move these strikes at all. You’re just going to roll it out to November and that's going to give you more credit and that credit is going to help move that breakeven point out further. That’s the first thing that we’re going to do.

The second thing that we’re going to do is we’re going to take this side that’s already profitable and we’re going to leave this side there. But for November, we’re going to pull in this iron condor really, really close, so somewhere around 45, 44. You think about it as sliding this side closer to the market.

The market is not going to be down here anymore, so there’s no risk of Microsoft going lower at this point. Now, the risk is that it continues to go higher, so what we’re going to do is we’re going to slide this put spread closer to Microsoft and that’s going to allow us to take in a credit which then helps move the breakeven point out further, trying to re-center this trade over Microsoft. That’s the logistics of how you do it.

When you actually go to your actual trading screen, what you’re going to do is you’re going to go here to the iron condor and you right click on this button right next to this little blue button and you’re going to go up to “create a rolling order.” Now, what we’re going to do is we’re not going to roll the put side. Remember, what we’re going to do is we’re going to roll this call side.

You see here that we’re going to roll it says the Microsoft weeklies to it’s basically saying the next October monthlies, but we’re going to actually change that. But it’s the call side that we’re rolling, the 46/47 to the 46/47. We click this and you can see here that it's just rolling it out for the next weekly contract, but you want to change that to the monthly which is November. Right now, we could roll that strategy. And the market is not trading, so these prices aren’t 100% accurate.

But we’d probably be able to roll that strategy out to the next month for a credit. Right now based on whatever pricing is in here currently, we’re able to roll that strategy from October weeklies out to the Novembers for a credit of around $.11. And that $.11 is going to help move our breakeven point out another $.11 and that’s the whole idea, is continuously move that breakeven out. That’s Microsoft.

Let's look at Pandora. Pandora, a very big-name stock, lots of liquidity, no problem trading the weeklies because we have the monthlies that we can roll to. And for Pandora, we decided to go with the 25/26 call spread and the 21/20 put spread below the market. Now, Pandora is a little bit different. Pandora actually has made a move lower.

Pandora has actually made a move lower from where it was earlier yesterday. Pandora was trading up around here yesterday and you can see that as of right now this morning premarket, it’s trading around 21.82. Now, this is actually fairly good for Pandora, so we probably won’t have to make an adjustment in Pandora.

We’ll see how quickly these options decline in value because today is the last day for them. We might focus on Microsoft first since that’s giving us a little bit more pain than Pandora. But you can see that it did move well within our standard deviation on either side for this market. Right now, we should see a nice little profit in Pandora, but the same thing would apply.

If Pandora does for some reason open up and just rushed lower and a lot of selling on the open, then what we would do is we would keep this put spread the same, we would just roll it out to November, keeping the same strikes, and we would take this call spread above the market, and we would slide it closer.

You’d slide that call spread closer and create a more tall or narrow iron condor and then get rid of this position out here which will expire today anyway. That’s the strategy behind it. And I just wanted to go over that a little bit more. It's easier to do now that the market is open, so that’s why I didn’t send out a video last night.

It’s a little bit different, I know, and some people always freak out because they love getting the videos at night which is cool, but this a lot more helpful to understand now premarket what your strategy should be heading into the trading day. Hopefully, that was helpful. And as always, if you guys have any comments or questions, please ask them right below. And happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.