The ‘Street Smart’ Guide to Earnings Season

[Image] The ‘Street Smart’ Guide to Earnings Season Welcome to earnings season, traders! If you’ve been trading this week, you might’ve seen some strange things happening with option contract prices. This comes down to more money moving around the market (liquidity), more people speculating (retail trading), and unpredictable price swings (volatility). All of these factors affect option prices during earnings reports. This means trading during earnings season has a lot of risk — and potentially huge rewards. But be cautious… Simply buying puts or calls right before an earnings report is closer to gambling than trading. It's like flipping a coin or trying to predict the outcome of a sporting event. That said, earnings season can offer some beautiful trading opportunities. You just need to know exactly when and how to trade during this unpredictable time… With that in mind, keep reading and I’ll show you how I trade options during earnings season. Why Traders Love Earnings Season For those trading options, earnings season can offer some wild opportunities. The outsized risk/reward profile associated with earnings brings out the most degenerate, casino-gambler tendencies in traders. Just take one look at [r/WallStreetBets]( for hundreds of examples of this. Now, why is this excitement good for us? Because it means there's more money and volatility in the market, which equals more opportunity for disciplined traders. Furthermore, earnings season tends to showcase some of the most exaggerated single-day price swings in the entire stock market. Even generally boring stocks can move drastically up or down depending on the content of the company's report. REMEMBER: The bigger the price swing is, the bigger the trading opportunity can be… I always look for liquidity, activity, and big price moves in any trade. Earnings season offers all three, which is why I'm always paying attention. But there's a catch... The Challenges of Earnings Season For traders, the main challenge during earnings season is that option contracts can get really expensive because of implied volatility (IV). Sometimes, even if a company reports good earnings, the stock doesn't move as much as you'd expect. Usually, a 20% stock movement can lead to big gains in weekly options. But earnings season, with its high IV, can mess up these potential gains. To succeed, you need to understand how option prices work during this time. During earnings season, experts estimate how much a stock might move after earnings. They do this by looking at spreads called at-the-money (ATM) straddles. Straddles are a directionally-neutral options trading strategy wherein the trader buys puts and calls on the same strike and expiration date. By looking at the prices of these straddles, experts guess the stock's 'implied move' and then price the weekly options accordingly. So, why does this matter to you? If you're trading during earnings, you want the underlying stock movement to be bigger than this 'implied move'. If the experts think a stock will move 10%, but it only moves 8%, even a directionally-correct best will lose money. This is why high IV can make trading tough during earnings season, and it's why I'm very selective about my trades. When I do trade during earnings, I tend to look for a specific kind of setup that’s delivered me excellent results throughout my 20+ year career… My Secret Weapon: The ‘Earnings Sympathy Play’ To me, cracking the puzzle of earnings season requires answering this question: How can you potentially benefit from these huge earnings moves without being forced to trade contracts with insanely high IVs and premiums? The answer lies in a setup I’ve worked on for many years — something I call the ‘Earnings Sympathy Play.” Let me explain… I love trading correlated names on earnings rather than directly betting on the stock reporting. I get much cheaper options and the stocks in the same sector can still move quite a bit. Here’s an example… If I see a big earnings setup in, let’s say, a chipmaker like Nvidia Corporation (NASDAQ: NVDA) … but the contracts are too expensive, I might look to trade one of NVDA’s sector peers as a sympathy play. For example, I may buy contracts in Intel Corporation (NASDAQ: INTC) or Advanced Micro Devices, Inc. (NASDAQ: AMD) to piggyback off the momentum from NVDA. Of course, this isn’t a guarantee, but it works a lot of the time… The upside or downside pressure from a sector leader can cause massive rallies or dips (respectively) in correlated names. But the correlated names won’t have IV or premiums anywhere near as high as the company reporting, providing you with more potential upside on your contracts. Closing Thoughts Earnings season is both exciting and tricky for options traders. While there are some great chances to make some serious money, it's easy for newbies to get overexuberant and take avoidable losses. After reading this, I hope you've got a clearer idea of how option prices work so you don't get caught off guard by high IV. Always check the 'implied move' before trading and, if the contracts are too pricey, consider looking for correlated names and executing an ‘Earnings Sympathy Play.” Stay Street Smart, Jeff Zananiri P.S. If you missed the live event last night, you’re in luck! Watch the FULL REPLAY of Ben Sturgill and Tim Bohen’s exclusive broadcast on the ‘11-day surge’ by clicking [right here.](   66 West Flagler Street STE 900 Miami, Florida 33130 United States [Facebook]( [Twitter]( [Instagram]( [YouTube]( [Click Here to Unsubscribe]( **Our gurus teach skills others have used to make money. Any results displayed are extraordinary and are not typical and will vary from person to person. 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