Lesson Overview

When To Place Trades

Because earnings trades are shorter in duration or timeline it's important to understand why we need to focus on very specific time frames for our trades.

More then any of the other general strategy that we use during the month, an earnings trade needs to be placed during a specific time before the actual company announcement.

By closing the gap in the time between trade entry and company announcement we minimize the risk of the stock making a big move up or down in advance that makes us unbalanced. This also allows us to completely focus just on the drop and implied volatility which is where we gain our edge and making these types of trades.

More Discussion

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  • Erik

    Kirk:

    At the very end of this video there was an AH-AH moment for me. I noticed that the MON Jan3 15 option chain volume exceeded the open interest especially for the OTM options by a factor 2 or more. It tells me a few things but also presents a couple of questions as well. It shows me that there is a ton of trades or professional traders doing the earning play a day before the news….either long or short. Knowing that, this is really an IV play, who in their right mind would want to be on the other side of this trade, doing a directional trade, trying to overcome both the “crush” and the b/a spread…in excess of 10%…in this case. By the way, does the b/a spread for these weekly options decrease going into earnings with the best spread the day before earnings? Thanks again, Erik

    • Yep the best opportunities are the day before earnings for sure (spread and volatility wise).

      • Erik

        Kirk:

        Any thoughts on why other professional traders are on the other side of these short IV trades, i.e. going directionally long? I am just trying to crawl into the minds of these folks especially with the probabilities going against them from the get go? Is it a lack of knowledge or just a behavioral habit/psyche or both? Thanks Erik

      • Just betting directionally for big moves.

  • Always the session before they announce. So if they announce after the close you trade before the end of the day.

  • I mean yeah I might do the 99 IV rank haha since that’s too tempting and couldn’t go conceivably highly. Honestly you could do it but realize that IV might not drop until the earnings event so you’d want to do anything risk defined.

Show Video Transcript +

In this video, I want to talk about when we should make the trade for an earnings trade. It's important to realize (going back) that earnings trades, we’re trying to pinpoint and focus our strategy on taking advantage of just the IV crush or drop that happens in stock after it announces earnings.

In order to hone in and focus in on just that moment and time, it’s best that we place these trades the day before the stock announces earnings or the session before the stock announces earnings.

In this case, we’re looking at Monsanto here on our chart, and we’ve used this one before, ticker symbol MON to show you guys some trades that we’ve made and how we calculate expected move and strike price, etcetera.

With Monsanto, they have earnings that are coming out tomorrow before the open. Today is Tuesday at the time of this recording of this video, and the stock has earnings on Wednesday morning before the market opens.

Because the market is going to be open after the stock announces earnings, we will have already hopefully seen tomorrow a volatility crush happen in the security as soon as the stock opens.

We won’t have any opportunity to get into a trade before the market opens because the market will be re-pricing all of the new data that it has on Monsanto after earnings.

The best opportunity to get into this trade is the day before or the session before, in our case, it's the Tuesday before they announced earnings.

You can see here in the chart; this would be this exact day, so that Tuesday before right as close to the close of the day as possible just to neutralize the effect of the stock movement as much as you can.

The reason that we get into it just the day before the session happens is that we don't want to enter a strategy just to have the stock make a dramatic move heading into earnings.

You can see had we made a trade in Monsanto expecting to get into an earnings trade just three days prior; we would've been trading when the stock was up around 120.

The expected move of this stock heading into earnings is about $3, so it’s already made just in three days heading into earnings of almost a $4 move lower.

If we would've made this trade on this day here where the stock was trading up around 120 prices, then we would've been either putting ourselves at a really big disadvantage or just make a directional trade on the stock as it heads into earnings.

We’re not focusing on just that implied volatility crush because if we’re trading it bullish or bearish heading into earnings, we’re not doing what we should be doing which is trying to sell premium ahead of a drop in implied volatility.

That's why and that’s one of the biggest reasons why we want to make that big move right before earnings and make that trade right before earnings.

Another reason that we want to do it (and I’ll just go to the charts here) is because the volume and the open interest for the security in those weeklies is going to be highest on the day before earnings or the session before earnings.

You can see here for the trade that we just made today, the volume today on both the calls and puts was the highest that it's been in weeks and that’s because a lot of people are trying to make trades ahead of earnings.

And what this does is this narrows the bid-ask spreads for most of the stocks, it allows you to get in and out of the trade very quickly at favorable pricing, so it serves really good purpose for us by allowing the other market participants to fulfill some of the requirements that we generally have for exiting and entering trades.

That's our video on when you should make earnings trades right before the market or the company announces earnings or the session before they announce earnings. That's the optimal time to get into these earnings trades.

If you have any comments or questions, as always, please add them right below this video on the lesson page and happy trading!

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