Earnings Plays. Profiting Around This Key Quarterly Event July 21, 2016

Transcription

1 Earnings Plays Profiting Around This Key Quarterly Event July 21,

2 How to Get the Most Out of This Class In a nutshell... Kick back and listen. This is a well laid out presentation. You don t have to frantically write down everything. This is being recorded and you will get a copy of all the slides and notes. Sit back and soak it in. There are hundreds of people in this class and I won t have time to answer all of your questions. But I guarantee by the end of this class you will be excited by the new possibilities regarding earnings trading strategies. You just gotta let me present these strategies! 2

3 And Onto... Earnings? 3

4 Earnings? Most stock prices move higher as earnings per share (EPS) grow quarter after quarter. This is the primary driver of consistent stock growth. A fall in earnings per share generally means a fall in the stocks price. 4

5 Why Earnings Plays? It s a huge point of interest where large numbers of players are involved. If a stock meets or beats their earnings expectations, it generally means the stock will move higher. A drastic beat = a drastic jump in price. Of course, an earnings miss generally means the stock will sell off. A drastic miss = a drastic fall in price. 5

6 Earnings Upside Surprise 6

7 Earnings Downside Surprise 7

8 Trader Fantasies There are many trader fantasies... But a recurring one is to bet the farm right before an earnings announcement, have the stock gap up huge, and make a fortune overnight. It can happen... and so can winning the lotto. This is why most traders lose money playing earnings. They buy calls right before earnings... Watch the stock jump up $10 after hours... And can t believe it the next morning when they are actually down money. We will talk more about that soon but heads up the game is rigged and outlier events are very rare (an outlier event is a completely unexpected super move that is well outside the range the market makers were expecting.) 8

9 Our Plan What we are interested in is consistent strategies so we can incorporate earnings plays into our goal of being able to trade consistently for a living. The key is to understand the earnings game and how it works. First when are earnings? 9

10 Earnings Season: 4X Per Year First reasonable question what is a good way to find out a company is about to release earnings? FREE 10

11 EarningsWhispers.com 11

12 Options Once we figure out the earnings date, we are then interested in developing trading strategies around these events utilizing options. The first step is to understand how a fixed earnings date in the future impacts the price of an option. 12

13 FIRST KEY Understanding Implied Volatility collapse 13

14 Implied Volatility When a stock is quiet, and there is no uncertainty on the horizon, then those options are cheap. This means there isn t a lot of premium built into the price of the option. The stock, in sum, isn t expected to move much, anytime soon, and the stock action is expected to be predictable. In other words... Boring. 14

15 Earnings and Implied Volatility Earnings, of course, are a very unpredictable event. Is the stock going to race higher after earnings? Or is it going to collapse? This uncertainty means that selling an option (remember, market makers typically sell options) IS VERY RISKY. And the higher the perceived risk, the more premium the market markets are going to charge for having exposure to these naked options they are selling to the retail public. 15

16 Earnings & IV The flip side of this is that the market makers EXPECT to make money selling these expensive options to uniformed retail traders. This is why, in most instances, buying a call or a put right before earnings, and holding it through earnings, ends up losing money. EVEN IF THE STOCK MOVES IN YOUR FAVOR! 16

17 The Basics In a nutshell, there is one and only one guarantee when it comes to earnings. And that is this: Implied Volatility rises steadily into earnings, and then collapses right after earnings are released. All of your earnings strategies regarding options have to FIRST take that irrefutable law into consideration. 17

18 The Path of Implied Volatility Into Earnings 10 days out 18

19 Implied Volatility Peaks the day of earnings, and then reverts back to where it was before earnings. 19

20 How Does This Impact Options Price? In a word, it destroys options price. ESPECIALLY OUT OF THE MONEY OPTIONS. Let s take a look... Note most options brokers have the implied volatility reading built into their platform. If yours doesn t you can go to and get it there. 20

21 IV First key understand that when earnings are released, implied volatility goes back to normal. This devastates the options prices, especially out of the money options. The suckers don t get this. We want to take the opposite side of their trades. We will get to specific strategies to take advantage of this shortly. 21

22 SECOND KEY Understanding the Implied Volatility Path INTO the earnings release date.22

23 The Path of Implied Volatility Into Earnings 23

24 Opposite? While IV collapses after earnings, it steadily increases exponentially into the actual earnings release date. IV on actively traded stocks typically doubles. What does that do to an options price... Even if the stock price doesn t move? 24

25 TSLA at 52.1% Implied Volatility 25

26 TSLA Implied Volatility Doubles Into Earnings? 26

27 AHA? If you weren t aware of this FIXED LAW of earnings plays, then you have been given a gift. This is why it makes NO SENSE to initiate an iron condor for income a few weeks before earnings. Or, worse, sell naked straddles. BUT... Do you see a great opportunity? 27

28 28

29 29

30 Long Story Short... There is a great low risk, high reward opportunity to buy delta 10 calls and delta 10 puts 2 weeks out prior to earnings. If you are biased to the upside, you can just buy the calls. It s low risk because they are so cheap. We ll come back to this... We are building on a process here. 30

31 THIRD KEY After the release, implied volatility collapses but price action Typically is a little crazy 31

32 After the Release Implied Volatility reverts back to normal RIGHT AWAY. This causes all of the out of the money options to collapse in price. But the near the money options are suddenly regularly priced With the stock being volatile. Strategies? 32

33 After the Release One strategy is to just buy an at the money straddle or near the money strangle and just hang on and see what happens. The stock will often times have volatile knee jerks both ways. 33

34 GMCR Gap Down 34

35 NFLX Gap Up 35

36 After Earnings The point here is that stocks can do a lot of crazy things once earnings are out. With IV now low, it is fine to buy a straddle or a strangle and kick back. This way you don t have any directional bias stress. You can often close this out at the end of the day and of course it is fine to let it ride. 36

37 Ok So Now: We have three powerful strategies: Buying delta 10 or lower options 2 weeks before earnings. Selling out of the money options on the last trading session before earnings are released. Buying at the money or near money strangles and straddles after earnings come out. 37

38 A Note on Deltas If you have a call option, and the stock starts to move higher, the delta on your option will increase. You may have bought delta 30 options, but if the stock rallies for a bit, your options will turn into delta 50 options, etc. This means that, initially, you were making 30 cents for each $1.00 move in the underlying stock, and now you are making 50 cents for each $1.00 move in the underlying stock. 38

39 A Note on Deltas So, the delta of an option lets you know two important pieces of information: How much the option will move if the underlying stock moves $1.00. A delta 70 option will move 70 cents, a delta 30 option will move 30 cents, etc. The approximate percentage chance that the stock will actually reach that strike. An out of the money delta 10 option means that the stock has about a 10% chance of reaching that strike price, based on statistical models. THIS INFORMATION IS PRICELESS WHEN IT COMES TO SELLING OPTIONS RIGHT BEFORE AN EARNINGS ANNOUNCEMENT! 39

40 Standard Deviation

41 Deltas & Standard Deviations? A stock will be contained within a 1 standard deviation move about 68% of the time. This means that delta 32 options, if you sell them, will expire 68% of the time. Bonus delta 30 strikes, for this reason, often represent hidden support and resistance on the charts. 41

42 Why? A stock will be contained within a 2 standard deviation move 95% of the time. This means that delta 5 options, if you sell them, will expire 95% of the time. For simplicities sake, I will refer to: 1 standard deviation as DELTA 30 2 standard deviation as DELTA standard deviation as DELTA 15 42

43 Let s Walk Through These Scenarios This first trade setup is the easiest. About 2 weeks prior to earnings on a major stock, buy delta 10 or lower options. Once this is done, you are DONE. Bonus if a stock moves hard one direction or another, that option is going to do great. If it gets to a delta 30, take it off and book your profit. Otherwise wait till the last trading session right before earnings to get out of it. 43

44 Day of Earnings On the day of earnings, we are looking to exit the long options we bought, and look at short opportunities i.e., selling premium. 44

45 The Basics This rise and eventual collapse does NOT effect the stock price. JUST THE OPTIONS PRICE. 45

46 46

47 47

48 48

49 49

50 50

51 51

52 52

53 53

54 54

55 55

56 Everything opens up worthless with a 0.00 bid and a 2 ½ cent ask. 56

57 This is my small spreads account to show how to steadily grow a smaller account without having to have a lot of equity swings or a lot of risk that you get when you are only doing directional options. 57

58 Iron Condors Perfect for traders who: Don t have a directional bias on the stock Want their total risk to be limited Want exposure to implied volatility collapse 58

59 Buy a Strangle? A week prior to earnings, you can BUY a strangle (out of the money put AND an out of the money call). Buy far out of the money delta 10 to 20. The profit comes less from the underlying movement of the stock, and more from the increase in implied volatility right into earnings. These can be held right before the last close that earnings are released. 59

60 Or... If your long strangle is profitable, it gives you more cushion to suddenly ADD a short leg to it.... This way you turn what would have been a 50 cent credit into a $1.50 credit with lower risk than a wider spread to achieve the same credit. 60

61 Bonus GOOG is $1000 and Earnings are on Jan 15. On Jan 7 buy the $1100 calls for 0.50 On Jan 14, the day earnings will be released after the close, the calls are trading for $1.50, giving you a profit of $100 per contract. The $1090 calls are selling for $2.00. You could sell the 1090s for $2.00 and create a 1090/1100 call credit spread for 50 cents. (2.00/1.50). BUT WAIT... you bought that 1100 call for 50 cents... Instead of a 50 cent credit, you have a 2.00/0.50 spread, or a $ credit. If both legs expire worthless, you will make $ And if it maxes out against you, you lose 61

62 Thoughts? This is a great way to squeeze extra dollars out of earnings plays for lower risk. And there is a benefit that the stock will have a big move higher or lower during that week or two before earnings, so you could have a big option move on your hand. In that case it is ok to take profit on the long option and roll into a new one further out. By buying low volatility AND selling high volatility, this strategy makes extra profit when compared to just shorting implied volatility right before the earnings come out. 62

63 How to Filter Earnings Prospects IV has to be at least double what it normally is. Needs to have liquid options. 63

64 How to Handle IC s That Hurt In a perfect world, all of our IC plays would be painless experiences of premium decay. But this is the markets... What is the best way to handle trades that go horribly wrong on one leg? 64

65 How to Handle IC s That Hurt Part of this will depend on the time left for the option spread you sold. If it s a weekly earnings play, then you don t have much time left and you have to be aggressive about PROTECTING YOUR PRINCIPLE! 65

66 Disaster? True risk is defined by the size of your trade. PCLN example: $46 expected move on earnings. I sold very near 2 SD out. Opened down $100 ouch! Yet because of how it was traded, able to trade around it and scratch instead of taking a max loss. 66

67 PCLN Earnings Aug 7,

70 PCLN Earnings PCLN earnings Aug 7, 2012, after the close. Expected market maker move $46 Stock was $ Sold the $595/$590 put spread and $765/$770 call spread Opens the next day down over 100 at ! Dang! 70

71 PCLN Earnings By trading small, this is something that can be defended. If this was a huge position, there wouldn t be much money left in the account to even initiate adjustments. At the opening immediately sold the 590/595 call spread and the 560/555 put spread to offset the loss in the original put spread. PCLN rolls over and sells off. Once it takes out the lows, sold another call spread at 580/585 to create more premium to offset the loss. I didn t sell another put spread. 71

72 PCLN Earnings Next day PCLN continues to sell off. Sold another call spread, 565/570 to take in more premium. Bought back the first post earnings call spread (590/595). Stocks tend to pause at their 2 SD level and churn. I could have sold more put spreads but the move was very hairy! If it had been less than 2 SD I would have also continued to sell put spreads. 72

73 Strategy Take in as much premium as possible to off set the loss. On Aug 9 bought back the call spreads and the new put spread. Get out of my original put spread at max loss. Turned a max loss situation into an overall small gain. 73

74 Adjustments If you are trading too big for your account, you are screwed. You take yourself out of the game if you are trading too big. If you trade too big, then your first loss is your best loss meaning you are forced to use tight stops. Which is a great way to not make any money trading. 74

75 What About Non Earnings Iron Condors? What about the next 20 days? (To monthly expiration) Square root of 20 is x 1.16% = 5.17 So an IV of 18.5% is pricing in an 81.5% chance that there will be a 5.19% move ($30.36) as a 1 standard deviation over the next 20 days. 75

76 Selling an Iron Condor outside of that range has an 81.5% chance of success AAPL = day 1 standard deviation move = $30 Sell calls $35 out and sell puts $35 out for a 0.92 credit 76

77 If you think that is a lot of work to figure out where to put an iron condor you are right. I use this excel spreadsheet to just enter in the stock price, IV, and days remaining and then it figures out everything else. 77

78 Earnings Plays: Scary or Awesome? Earnings are attractive opportunities. They represent the 4 times per year when a stock can make a crazy move. This creates opportunities for profit with limited risk if you know what you are doing. And opportunities to blow up (if you don t) 78

79 79

80 80

81 Most Traders Get it Completely Wrong Traders get lured in and buy or sell the wrong stock at the wrong price. Lots of emotions involved! And if they trade options, they don t fully understand the option greeks which skew prices on earning days, causing retail traders to lose money over time. And finally, they don t protect, or know how to protect, their trades if something goes wrong. There is no need to panic or lose sleep! 81

82 Good For Newer Traders? This is a perfect strategy for newer traders will small accounts that are looking to grow them quickly. It s also great for veterans with larger accounts who are tired of market maker games in the options market. If you don t want to stare at your positions all day long, then this is the strategy for you. 82

83 8 Live Trading Earnings Sessions Best strategies into and day of earnings for account consistency and growth. The most consistent strategies for the day after earnings know when to jump on the train or fade the move. The safest trade to do even on a crazy stock like NFLX and how you can turn a losing trade into a winner the next day. Knowing exactly what to do whether it s a move up, down, or sideways. 83

84 8 Live Trading Earnings Sessions For the live trading, we will be focusing on FB stock plus a handful of others. I ll walk you through exactly what to look for and why, and how to structure the trade based on the statistics. And we will follow through the next morning, live, to trade the after the announcement move. There is even a way to buy the stock after hours at no risk... 84