Earnings Announcements: An Options Trading Checklist

what can we expect with option prices leading up to earnings so this earnings segment we decided to do four best practice just to give it just to kind of we did earnings last week on for a tasty bites account but we decided to do earnings for best practices just to give we're just this is a big week for earnings and just to give a little kind of just things maybe we pull a few ideas back from back from the dead sure past past market maybe a few things just kind of like stick toss a little let's toss a lot of spaghetti against the wall in this earning segment this morning and let's hope that some stuff sticks for everybody so what can we expect with option prices leading up to earnings when earnings approach front month options are priced to reflect the uncertainty of the pending binary move a binary moves just an overnight move or a very short-term move the IV differentials where the potential opportunity lies we look to place premium settling strategies to take advantage of high volatility this is not black swan' premium risk meaning that this is not market black swan' premium risk this is overnight market premium risk my worst earnings trade or my one of my worst trades in the last couple of years it was a prior Netflix earnings debacle mm-hmm so you can have the equivalent of like something like a a nasty event but it's not a mark it's not a market Black Swan risk sure very different in that case how can the expected move be estimated the expected move can always be calculated in calculated manually but we do it two different ways we talked about a lot on this show take the at the money straddle price and x 1.25 it's the front month at the money straddle plus the first out of the money strangle divided by two we've done this a gazillion times it's all of you know on there I'm sorry it's all on the stuff that we do how can we choose which earnings to use for earnings place because this becomes a little bit more interesting like how do you know what whether to do what you say is G or Netflix or or or McDonald's or Netflix correct well yeah I mean like which one are we going to do as for every day trading we will only choose underlines that are liquid this allows us to easily enter in exit positions now if you do an earnings play and the stock goes exactly the opposite direction I mean it goes the direction you want to go I mean it's easy of clubs because the binary move pushes everything to zero but just in case it doesn't happen that way you need to be in a situation where everything's liquid because liquidity is the only thing that can save you so we may need to keep the dream alive if the earnings move goes against us or doesn't do exactly we want to do because of this we need liquid stocks and options for any required hedging or rolling I think we took a position off on Friday that was or on Thursday that was in I think was an Adobe or something I have to I have to check I want to say was Adobe but um you know it took us it took us a couple physical weeks the 16th yeah yes don't you we bought something in for 548 just liquidity allows us to hang in there mm-hmm that's all um which was also an old earnings play yeah can we locate locate liquid underlyings with earnings in dough under the grid page we can locate liquid underlyings with earnings in dough under the grid page one of the nice features here is that we built it right into the platform so that even if you're trading on thinkorswim and you want to use dough just for earnings go ahead right it's got a really slick earnings interface and all we care about is that you know like if you go to if you look at this page here on dough this is the left hand side you click on on the grid and then you could go ahead yeah I mean this is about the slickest earnings interface that you're going to see just from just ease of use that's all and so you don't even you know if you're not trading on the platform you should be considering at least using this earnings interface here it has every clearly free right yeah yeah yeah so just you can look gives you the IV rank right in the middle and then this example you got Apple trading at 60 if you looked to the left of that you got AAL trading at 34 so the estimates aren't that important what's more important is just you know you can see you can quickly get a scan of the IV rank and everything else and just at least find out what's in play the earnings estimates themselves are actually meaningless so why don't we take the pass move it into account when choosing strategies for earnings plays which is a great question because a lot of people to a certain extent I do that sometimes it's not that I take the pass movement into account for choosing what I'm going to do next is that I take the past movement to think hey maybe they straighten themselves out hmm so as our studies have shown early moves are just as random as normal market activity by understanding the directional randomness about binary events it is the premium selling that gives us the statistical advantage that generates returns what does that mean that's a good question right so I mean all you're looking at is what has happened in the past with the earnings to get an idea of what's going to happen now but again it also comes down to IV rank in the IV of the month the monthly IV so so the way the way pricing works for any kind of derivatives is that if you're if you're if you're willing to if you're willing if you wanted to have unlimited potential you want to just be able to make you know whatever it is you want to be able to make a hundred dollars a thousand dollars a million dollars whatever it is in earnings it what I mean by that is if you want to play for unlimited upside based on the amount of risk you want to take you you essentially you buy unlimited upside the cost of unlimited upside is significantly higher than the actual move what that means is an option let's say options price in a dollar and the reason that you're paying a dollar for the option is because you get unlimited upside on that option just just hear me out for stuff you rather than going place your options trading for a dollar the reason it's the reason it costs $1 because we're the buyer of that option has unlimited upside the seller of that option knows that that options probably only worth about 80 cents on a binary event you're talking anywhere because less than where it's trading for because of the uncertainty of the binary event take take a take take any upcoming event to just think about this you would nurse you would never sell something at a theoretical value so you're going to sell something that is that takes into account that unlimited upside that you're giving somebody else so if you have an opportunity to buy I should say this better if somebody's buying an option at a dollar it's worth a dollar right then but the image trading right because that's where it's trading at but but you're paying a dollar for something because it has the potential to provide unlimited returns if this was a normal day without earnings you're suggesting that there no no no that's just anything I'm just saying if you pay a dollar for something that's because that's the theoretical value of that you paying a dollar because it has unlimited upside potential that dollar can go to anywhere but the reality of once the event has passed is that the option itself with taking out that unlimited upside based on whatever that you know binary upcoming move is it's probably worth about somewhere between eight and twenty percent lower than that so what you're doing is you get the opportunity to sell something that you know is overpriced even though that's where it's theoretically trading but because you're taking the risk that it doesn't have that move outside of expectation that's what you get paid so the sell of that option gets a discount whether it's an eight percent discount or a twenty five percent discount whatever the discount is the seller the option gets a discount the buyer gets a discount the seller of the option gets a discount the buyer of the option pays a premium the buyer pays a premium the seller gets a discount and and what ultimately ends up happening is if everybody's or gets to do something in a discount in the end most of the time the seller gets rewarded for the few times that the buyer gets rewarded you know that's the sellers risk okay I agree with you but the same the seller gets a discount that would imply that it's trading lower it's well I don't know how else to say it well the sellers sellers selling something at a premium and the buyer is paying a premium for it over theoretical value because of the high input it's not over theoretical buy because that's a traders trading yeah see the problem is that that's the hard thing for people understand if this if this cup is true some eyes will pay a dollar for it that is worthless I want to sell it a dollar than that so Shekhar today it's worth a dollar tomorrow it's either worth unlimited or zero or or 80 cents let's just say make it simple if nothing if nothing changes that goes to 80 cents that's all and that's and that's essentially what earnings are all about do you want the 85% chance that this comes in by 80 cents or that the or that the upside prices is that the upside is a little bit overpriced and that's it that becomes the whole game I can be with calls or puts that's right and that becomes the whole game it's just you know I mean pricing model how do we decide on a strategy for earnings plays well we want to make sure that we're selecting the right trades to take advantage of a quick volatility crush for this reason we usually sell naked options in the form of straddles or strangles we may also adjust these strategies to reflect a directional assumption the other day I took a directional I made a directional bet and underlying we make a lot of directional bets sometimes they work sometimes they don't but a lot of times you know you just a little nervous sometimes the straddles especially of certain stocks like Netflix you might just want to take a one-way directional bet other stocks you know like like Google I took a two-sided bet and it worked out sure so it's it's really hard to say right meaning you sold both sides non directional yeah Google this morning is down a couple dollars pre market but it was up like $20 on Friday um you know it's it's it's it's extremely difficult for um um nobody really knows it's not like it's not like some trader knows that the best play in Google is to sell both sides or some trader knows the best place to sell want you know sell sell the calls are celibate nobody knows sure that's why we said is I decided I'm going to try to bring on a couple of people that onto the show that run publicly traded companies and the reason is because I want them to tell you that how little they know about where their stocks going to go based on earnings and you'll be surprised when you hear it directly from directly from people that run publicly traded companies and I'm hoping that we are able to secure a few people because nobody knows not even people don't run those companies understood so are there any earning specific trades sure you can do any kind of these iron condors we have a chicken iron Condor something set up trade a Super Bowl will archive all discussions I'm just defining them and we're just mentioning them here you can go back on the search feature inside of tasty trade and check out what the Super Bowl is what a sign set up trade is or a chicken a con yeah I mean four different all set up for earnings plays right different people different positions may just fit their portfolios better that's all strokes for different folks and following a binary event when do we close our position what we generally close it immediately following announcement there's no reason I mean yeah we could have held on maybe on Friday for an extra five cents in Google I mean really there's something to do if your position is being tested then we then we may look at it differently or extend duration or rolling it we have a thing we did on six eleven fourteen where you talk about earnings exits but what we found is win or lose get out of it early and move on unless unless you have an axe to grind in that particular on July just get out early and move on agreed as kind of a as kind of an earnings recap um if the markets get busy again we will use earnings a lot less mmm because earnings to me are uh they're they're an engagement tool and they keep us they keep us they keep us active sometimes when there's not much else to do but it wouldn't be my favorite trade if your favorite trade is 45 days to expiration or your favorite trade is to truly be a contrarian and earnings plays not that that's correct so so so if you need to give yourself time to be right and you want to manage winners and you think that's the best policy to make you money then earnings traits are not that agreed okay there's no reason to trade earnings trades if there's better opportunities around earnings trades are much more of a kind of you know roll the dice flip the coin and I just think that the more we learn there is a very very small edge or there's small opportunity in some of these earnings trades we learnt the other day that if we're able to collect on high implied volatility greater than let's say twenty percent of the expected move then we have a statistically high chance of success for that reason maybe you do an earnings play but we also know that statistically speaking it's way better to trade with 45 days to go to expiration it's way better to put ourselves an opportunity to manage winners it's way better to be much more diversified with respect to risk reward than it is underneath trades but when there's nothing else going on and that's where your high volatility is you don't have a choice Tony if you put up if you put up right now go to doe and you hear someone show everybody so what I did was I just loaded it up here and I just clicked on the little filter don't filter just just say any just say any ib rank but don't take out on these plays but any ib rank over 50 okay why don't you show you something so I'm did I just put it back to where it was it'll default to it'll default to it smells and everything else so this is all the opportunity including earnings plays with an IV rank over 50 alright and you can scroll down a little bit that's correct when when you when you're looking at here you can you can see on the top that you got something like Whole Foods has earnings coming out but is I'm honest but just just scroll down for a second so there's six of these earnings plays there's six of these plays on every line these are all the underlyings with an IV rank over 50 that's correct so here's so here's CMG and I think you're gonna see that Netflix is probably not on here because I don't done we're about just to just scroll down for a second so you see there's there is literally you know each line has six so we're talking about you know I don't know 70 80 different stocks that are in play because of earnings sure now go back up to the top to the filter and filter out earnings plays okay those are lyrics plays no filter out the yearnings plays oh you don't want them and I do not want your sore eyes got you okay now these and hog actually is an earnings play nice pep that needs to be taken off there are two non earnings place up there cuz hog has earnings today so there is is RG and wag whe so when Tony and I sit here we do a segment on earnings the reason we do it is because there are two non earnings plays now if there was sixty non-earning x' plays we wouldn't even be considering earnings right but there are two non earnings plays that have over fifty Ivy one is Walgreens which you already have a position on and the others is RG which if I remember correctly it's like a three four hundred our stock I mean it up with illiquid markets you write this so it probably shouldn't even be on this list so you're talking about in hog has earning does it does have weekly ops does okay fine yes but you're right there they are okay so you're talking about one maybe two stocks now go back and unfilter one more time just so people understand kind of why we do all this now this is if you include all the earnings plays so sometimes it's not really that hey I can't wait to trade earnings it's just that hey this is what there is to do mm-hmm agreed you know like as as much as you as much as you want to go someplace else to display maybe a nice ETF that's completely whatever it is that has a 75% IV rank is just not there right now so again I just because I want to make this really clear we talked about earnings because that's what's there that's what there is to do right now if there wasn't any earnings I mean we when you see that there's not very many stocks that are kind of in our range IV rank wise to trade and then when you trade earnings you know it's a much different risk profile you have to stay small and you have to and you have to recognize man we don't know anything that's correct so that we know anything so that we don't anything else it's just it we give ourselves the opportunity to make to make a lot better judgments around strategy with 45 days to go there's a lot of stuff we can do with one day to go man you're pretty limited absolutely okay that's it

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Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, earnings, binary events, earnings play, option prices, Implied Volatility, IV Rank, Expected Move, dough, trading platform, options strategies

Id: 8zJa19jSaBg

Length: 17min 20sec (1040 seconds)

Published: Mon Jul 21 2014