Lesson Overview

Earnings Option Strategies

An in-depth discussion on the best strategies to use to profit from earnings trades. I'll also include tips on how you can reduce your margin or capital requirements by adjusting your strategies slightly and reducing your risk at the same time you enter the trades.

Remember, that as traders one of the ways we get an edge in the market is by appropriately choosing the right strategy to fit that situation. Since our earnings trades are shorter in duration or timeline we have the ability to trade strategies we wouldn't otherwise use for monthly income trades.

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  • Joe

    Hi Kirk,

    Just by doing a little sample of the same strikes across different expirations, it seems like Vega is higher for longer dated options (as well as Delta for that matter). I could be looking at this all wrong, but If this is true, is either volume/liquidity, lower Delta, and/or higher Theta the main benefit for trading very close dated options for earnings trades? If not, what is the main reason to choose the closer expiration?

    Thanks!

    • Hey Joe – yeah the closer options are just juiced up on IV even though the actual VEGA may be higher in the back months because of their longer time frame. Theta is of course very quick in the weeklies which is also a main driver. When you look at the actual IV of the contract months in the “Trade” tab you’ll notice that the IV for closer expiration contracts is much higher around earnings – sometimes the weeklies will have IV of around 90% and the next monthly contracts will be down at 30% so there is a 3X higher IV in the weeklies. This help?

  • You got it great example and thanks for posting it for everyone (this will save me from writing thousands of emails on this topic this year).

    • Joe

      Awesome! You have really helped me gain a better perspective! …and I definitely hope it saves you from some emails! :)

  • Yes still the same though I typically always make them small just in case there’s a big move in the underlying.

  • scottie

    Thanks Kirk, for another great video!! Is it safe to say that if you sell a straddle or strangle at earnings, someone with a smaller account should substitute with a an iron condor or butterfly (purchase OTM wings for up and downside protection)? Thanks again.

  • I think we covered this a little on the strategy call last night if I remember but let me know if you still have questions Zack.

  • scottie

    Hey Kirk. Thanks for the great info as always. Q about earnings season: I’m currently long 200 shares SCTY (cost basis was 28.19) with earnings announcement on 5/9. I know that some traders don’t hold stock through earnings but I’m longterm bullish on the stock, so my inclination is to hold and brace for shock, or gap up:). 1 covered call against 100 of the shares would take in some gains if the stock gaps up, goes up, doesn’t change or doesn’t drop too much, but I’m not sure I want to relinquish the shares just yet and I’m not sure how to proceed. Any suggestions?

    • Depends on how bullish you are on the stock. I would suggest at least doing the covered call so that you take in some income if it does drop or stay the same.

      • scottie

        Thanks Kirk. That’s what I figured. I’m ok letting go of the stock if I can get a little profit thru the short call premium and the upward movement of stock price. Would you still recommend going with the nearest weekly expiration or the monthly in this case? How many strikes up OTM would be ideal for the short calls? Thanks again for the valuable education. My wife is very impressed with what I’ve learned. Thanks to you!!

      • Nearest weeklies – you can always roll to the monthlies if needed. “Happy wife, happy life!”

  • Juan Diaz

    Great video Kirk! I noticed that your first trading strategy for “Earnings” is the Straddle strategy. For limited risk strategies, would you consider using a Short Iron Butterfly before an Iron Condor for a bigger credit? Thanks.

  • Correct – shorter period and we are just trying to get outside the expected market move for earnings.

  • Yep for sure (and have done a lot of them) and yes you still want break-even points beyond the expected move.

  • Sure as long as you realize that it’s more of a 50/50 shot with the one day event.

  • 1) Yes that’s the next best choice.
    2) Yep iron condors are always better on an ROI bases but then factoring in commissions opens and close as well as the overall total dollar credit the one straddle seems better for a big account.

  • Yep and straddles, strangles are easier to adjust for sure.

  • stephen dawkins

    Hi Kirk,

    I like the chart setup you have but am battling to reproduce it in TOS. My chart has volume as the secondary chart and I cannot find out where I change that to implied volatility. I have checked settings and ma not seeing it. Help!

  • The MMM is for the actually earnings event itself and the contract expected move is by the expiration date – help?

  • Ah yes I see what you mean now – even with one day left the MMM is pricing in the actual earnings move for the morning after announcement. The other one in yellow is pricing in the move for the entire rest of that day until expiration.

  • But the reason you buy back early is because the stock could move a lot between the morning and afternoon the day of earnings. Case in point, CMG moved more than $100 on us 2 years ago between the open and close.

  • Yes with earnings trades. We just want to take advantage of the IV drop itself but not hold for some specific price target.

  • Yes correct – all trades where you can get high IV and a credit that is outside the expected range.

  • Yep expected move is about 70% probability of success range.

  • yong khoi Ng

    hi Kirk,

    Can we use the “1-day expected range” in the watch list as an alternative to the expected move of an underlying for setting up a high probability earnings trade? The “1-day expected range” in the watch list is based on 68% SD and is updated daily ?

  • Jaime

    Hello Kirk

    Quick question TSLA right now has an IV Rank of 41 (watch list) and it says to do a diagonal but with earnings happening tomorrow wouldn’t the iron condor be a more appropriate strategy?

    Thanks

    • Yes iron condor, strangle or straddle BUT only if IV is above 50. We really have to stick to the 50 IV for earnings trades.

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