Lesson Overview

When To Exit Earnings Trades

Since we are trying to target just the IV crush that happens after earnings it’s important that you be proactive in exiting these trades quickly after the market open should the stock test one of your boundaries. In this video we’ll walk through a live example of how exiting BBBY early after the open save us from taking a huge loss. Plus we’ll look back on another trade in CMG where we learned our lesson the hard way last year.

Show Video Transcript +

In this video, I want to talk about the importance of exiting earnings trades quickly after the market open if you have a nice little profit or if the market is testing one of your sides.

One of the ways that we suggest that people trade earnings are to enter them very close to the end of the trading session or the previous day, whenever they’re going to announce earnings for that particular stock.

And we’re trying to target just the drop in implied volatility, so we also want to be quick about how we exit the trades. That means that we don't be greedy and don’t try to get everything out of the trade that you can get.

If you have a nice profit, go ahead and take that profit off the table and bank a winning trade. We learned this lesson a long time ago in Chipotle because we were pretty greedy on this trade and what we could've had is a nice couple of hundred dollar profit ended up turning into a loser.

I’ve got on the screen here a look at where Chipotle was when we made that trade. This was the day back in April where we made this earnings trade in Chipotle, and we were playing it directionally bullish, so we were assuming that Chipotle might go higher, so we tilted our strategy that direction.

In doing so, I ended up with a pretty nice trade because Chipotle opened up at the top end of its range. You can see the stock opened up about $40 higher than where it had traded the previous session.

Everything was really good. We also saw that drop in implied volatility that I’m pointing at right now on the screen. That was really good. We saw everything that we needed, yet we were completely greedy in how we went about it.

We assumed that that $40 move would stay there all day. Little did we know that Chipotle just continued to move down for the rest of the day and ended up making one of the biggest reversals it’s made in its stock history going from about 580 down to about 510 at the end of the day.

Our profit that we had at the beginning of the day quickly almost immediately evaporated, and we did nothing about it. We came back and checked it later.

This proves the point that you’ve got to take advantage of what the market gives you, and if you have an opportunity to get out of a trade especially with earnings trades, you want to go ahead and take that profit even if it's really small.

To prove this point just a little bit further, we’re going to also look at Bed Bath & Beyond because Bed Bath & Beyond had earnings today and we played earnings.

We got out of our strangle in BBBY earlier in the morning and right now, the stock is continuing to move lower. You can see it's just trading live in front of us. It’s continuing to move lower past 73.

Our strangle at the 74 and 75 level, so you can see that the stock actually opened up inside of that $74 range which was really good and we got that implied volatility drop that we were expecting, so that was also good, so we had to be diligent about closing out the trade and banking a profit.

We didn't bank a huge profit, but we sure are avoiding a pretty big loss here in BBBY if it does continue to move down for the rest of the day and end the day lower.

Just to show you guys exactly what we’re during here, here's a look at the positions that we had for BBBY for the last two days. Here's the entry order that we had, that strangle that filled and you’ll just want to take a look at the filled orders which are here at the top.

These are all canceled orders, so we’re trying to get at different price points that never got filled. But you can see we entered this trade on 1/8 at about 15:28 in the afternoon, so about 3:30 in the afternoon right before the market closed.

Notice how quick we were to exit the trade. About 9:42 in the morning, we exited this trade and banked a profit. It wasn’t a small profit. We took a $77 credit, and we closed it for a $.50 debit.

We made about $22 on the trade, but currently, if we were to get out of this trade, it’d probably be a couple of hundred dollar loser right now because of where the stock is moving.

It just really proves that point that with earnings trades, if you see the stock open inside of your expected range and you’ve got a nice little profit, and implied volatility has already dropped, what else are you trying to take advantage of?

That’s what we’re going after here with earnings trades. You’ve got to use what the market gives you and take that trade off the table and bank that profit.

Hopefully, this is a really good example not only of things that we’ve done before in the past that we’ve learned from, but also a live example right now of a trade that’s currently going wrong that we exited early for a profit.

As always, if you guys have any comments or questions on these videos or any of the videos that we do, please add them right below on the lesson page. I’ll get back to all of those to make sure that you guys get the answers you need. Happy trading!

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