Proven Ways To Profit From A Stock’s Earnings Release Using These 3 Option Strategies

earnings release
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Earnings are coming, and you want to trade - I get it.

But typically stocks will jump higher or lower after earnings right?

Maybe the company announced great profits or disclosed more layoffs; either of which could send the stock into a big gaping move.

So how do you trading options around earnings (and profitably at that)?

Today we’ll dig deeper into earnings trades and the options strategies you could use.

The Earnings “Volatility Drop.”

The first big concept you need to understand about earnings is that, in general, a stock's implied volatility will rise as it heads into earnings.

Not because the stock is necessarily more or less volatile but because there is a lot of uncertainties (or risk) around what will happen during the earnings announcement.

This one-time event swells option premiums on BOTH sides of the market. As an options trader, this creates an opportunity to sell relatively expensive options and profit from their decline in value.

Volatility Crush

Once the earnings are announced, we usually see a “volatility drop” or “volatility crush”  (highlighted on the charts with the green line at the bottom) and option premiums decline across the board.

Again this is because we are now past the uncertain earnings event and have a relative understanding of the company’s future. Good, bad or indifferent the market is more aware of things moving forward and doesn’t have to price in the added risk.

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 ?

Target Options Selling Strategies

Now of course we don’t always see a volatility drop but in most cases we’ve researched IV will drop very quickly after the earnings event.

Knowing this fact, we need to focus purely on option strategies in which we are net sellers of options.

Within our membership program, we focus on three primary strategies around earnings:

The first strategy we look to enter is either a short strangle/straddle where we sell an OTM put and an OTM call an equal distance from the current market price. By taking a neutral outlook on the possible move in the stock, we minimize our directional guess of an earnings pop or drop.

Strangle

The last thing you want to do with an options trade around earnings is a big bet in one direction. Your best trade is to stay non-directional and adjust as needed later on.

If you can’t sell options naked or don’t want to take on the additional margin risk, then you can use our 3rd favorite strategy - the short iron condor.

Iron Condor

Selling a short put and call credit spread on each side does reduce your risk that a huge move will create a big loss for your portfolio. However, the cost of buying the additional options to protect your position means less potential profit.

Regardless, as long as you stick to selling options with high implied volatility you should be much better off than buying options around earnings.

Exit, Adjust Or Roll Positions After Earnings?

Alright, so we’ve covered why to trade around earnings and that strategies to use, now let’s briefly talk about managing the position after the stock re-opens post-earnings.

In nearly all cases, you’ll see some gap in the stock price as investors react to the company news.

If the stock stays within your strike prices on your position, you can easily exit the trade and close out the position for a profit. This is the ideal situation of course.

But we all know that the market doesn’t always do what we want right?

So what do you do if the stock moves outside your strikes and goes ITM? We do have some options (no pun intended). . .

Your first adjustment should be to roll out your option to the next contract month and take in more premium. For example, if you had a December expiration option you would roll it out to January end (at the same strike price) and take in an additional credit.

Rolling Options AAPL

With more time and a higher credit on the overall position, you give yourself more time to profit while also moving your break-even points out more.

Additionally, you can also roll in the other side of the trade that is currently showing a profit. If the stock moves higher, you will roll UP the put side, and visa verse on the call side if the market moves DOWN you would move down the call side.

Both of these adjustments will give you a higher statistical chance of making money even if the stock moves against you at first.

NKE Earnings Case Study

Just the other month we sold a strangle heading into NKE earnings. Here is the video setting up the trade:

After earnings, the stock gapped lower in a big way and forced an adjustment similar to what we covered above. We then sent out another video to our subscribers going over the adjustment in detail which you can watch below:

In these videos, you can see how we took what would have been a losing position and by making a small adjustment turned it into a small winner!

Share Your Best Earnings Trade!

It's okay to brag a little here. . .

Add your comments below and let me know what the best earnings trade you’ve made looked like. What was the setup? What strategy did you use?

Sometimes the best trade isn’t a trade that you make money on but that you reduced a loss on. If so how did you adjust it to reduce your loss? Did you roll UP in strikes or OUT in expiration months?

Here's A Quick Bonus Video Tutorial

Ever get just bearish on a stock? I know I did on JCP & QQQ a while back.

And when placing bearish trades it's important to consider the cost and the break-even points.

For example, in this video tutorial we’ll show you why our JCP trade gave us some extra “buffer” room in the stock which allowed us to take later a very big profit.

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.