In this post:
- How do our traders minimize their risk?
- What are the three different ways to play earnings?
- How many times a year do we play earnings?
Earnings season is upon us, and I know many of our traders will be trading it! As you probably know, earnings trades can be more unpredictable than normal. So how do our traders do it? They minimize their risk using their unique combinations of analysis, strategies and trades. In general, they analyze prior earnings moves, combined with their individual technical analysis methods, and intuition from years of experience to trade this season.
John, Henry, and Bruce actively trade earnings season. Neil and Carolyn prefer to stay away from earnings. The key, as always, is figuring out what works for you with some help and guidance from our experts along the way. Earnings can be daunting – but making plays for earnings is the same as playing setups during any other time of the year. You just need a setup that is backed by analysis, and a plan to enter and exit your trade.
There are three different ways to play earnings, and you’ll notice our traders trade them in slightly different ways, while looking at similar points to make their decisions. You can make a play in anticipation of the announcement, hold through the announcement, or play price action after the announcement has been made. Check out this summary to get an idea of how they make their bets, and tune in to their live sessions to see how they place these trades real time!
John loves the opportunities that come around four times per year with each earnings season, and he has specific strategies that he utilizes during this time based on patterns he’s learned overtime.
John’s technical analysis tools:
* Overall Trend – He goes into earnings trades with the overall view that hedge funds are smart, if a company is doing well, hedge funds know it and buy it going into earnings.
* Chart Patterns- John is all about using past patterns and results to raise his probabilities to play future setups.
* IV Percentile – He places high importance on IV values because he loves the vol crush.
* Prior Earnings Announcement– What does the stock’s average move around earnings look like? Has it been all over the map, or largely statistically similar?
* Expected Move – What is the expected move? Has the stock stayed within it’s expected earnings move before?
* Options Activity – Open interest and volume.
Pre-Earnings Play (selling before the announcement): He likes to play the IV rise into earnings on strong stocks, going into earnings. He likes to use long calls to make this play.
Pre-Earnings (holding through announcement) – John likes to utilize ATM call or put credit spreads after he’s made his judgement call on which direction he believes the earnings report will take price action. He does this to get a 1:1 risk/reward ratio. These trades are risky because it can easily go to a max loss if you’re wrong on direction, but by defining your risk and having caution with your position size, this is how you mitigate the play.
Post-Earnings Play – John’s favorite earnings trade is the after earnings setup. If a stock moves about 2 times the market-maker expected move, he expects the stock to continue grinding higher over the next 4-6 days. As such, buying calls or selling put credit spreads is the way he plays this. He will also trade stock after hours, depending on the results of the report.
Bruce is a fan of earnings, because as he states, he can get three solid trades out of a single stock that are all very different. He is much more of a long-distance hitter and he looks for earnings traders probably 4-5 weeks out, going through the announcement and holding after-earnings plays for another 5 weeks after the announcement. For the most part, it’s all about the volatility.
Bruce’s Technical Analysis Tools:
1. Volatility – He’s looking for both high and low volatility, and where we are at currently based on the previous high and low. He especially compares implied volatility to historical volatility.
2. Prior Earnings Announcements – Bruce likes to go back 1-3 years in time to compare earnings history.
3. Overall Market View – Is the overall sentiment of the market trending higher or lower?
4. Overall Stock Trend – Is the trend up or down?
5. Options Activity – pick a direction, put/call ratio, volume and open interest
6. The Greeks – The Greeks can tell you everything about where you are and where you’re going in a trade.
7. Expected Move – Only important going into the week of earnings
Pre-Earnings Play (selling before the announcement): – This is all about catching the volatility run into earnings. He uses his favorite strategies, calendars, diagonals and butterflies to make his play.
Pre-Earnings (Holding through announcement) – Bruce likes to play the vol crush with a strategically placed butterfly or a credit spread.
Post-Earnings Play – This is a completely different play because now you know the reaction to the announcement, you have the vol crush, and you’re able to reload on your positions. At this point, he will utilize various strategies that could include long calls, diagonals or butterflies.
Be on the lookout for Bruce’s future earnings class so you can learn these strategies live! (Class date not yet scheduled.)
“When you’re trading earnings, you always have to remember that all of these trades could go to zero tomorrow. Trade small, trade often, and try to keep your wits about you.”
Henry likes to play earnings that come out after market close, and typically places his trades right before market close.
His technical analysis tools consist of:
* Overall Market Sentiment – Henry likes to take trades going in the direction of the overall market.
* Price Action and Chart Patterns – When making his trades, Henry always keeps in mind the overall chart pattern on larger timeframes.
* Moving Averages – Where is price in relation to moving averages? This is a great indicator of the strength of the trend.
* Expected Move – What is the predicted expected move, especially in relation to the support and resistance from voodoo lines and targets based on Fibonacci extensions.
* Prior Earnings Announcements – How has the stock reacted to earnings before the past few times?
* Voodoo Lines – Henry likes to keep in mind where major levels of support and resistance lie.
* Fibonacci Extension Targets – How does this line up with expected moves?
* IV Percentile – When selling premium, IV is considered to look for a vol crush.
Pre-Earnings Play (selling before the announcement): He likes to play the IV rise into earnings on strong stocks, going into earnings. He either buys calls, straddles or strangles to bet on the price of the options rising along with the price of the stock, into the announcement. This play depends on whether you’re playing direction and volatility, or purely volatility.
Pre-Earnings Play (Holding through announcement) – Risk/reward scenarios are always at the forefront of his mind when making earnings plays. He likes trading both directionally on earnings plays and neutral, utilizing most frequently butterflies,
unbalanced butterflies for a credit, or selling ATM spreads or iron flies. These strategies maximize your reward, while keeping your risk in check.
What do I think? When I was a new trader, I considered it to be a gamble. My first few earnings seasons as a trader, I merely sat back and watched. After a while, I wanted a piece of the action. I saw the strategies that the traders used, figured out what fit my risk/reward parameters and tolerance, and started employing them myself. Now, I like trading earnings. I just always keep in mind that because of their unpredictable nature, I keep my position sizes smaller than usual, and spread my risk over various companies and trading days.
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