How to Research & Trade Earnings using Options (Step by Step)

okay good afternoon and welcome back everyone to our options education webinar series my name is tony zhang i'm the chief strategist here at options play and we are kicking off another earnings season for q4 of 2020. this is the last quarter for 2020 and what we really want to do is make sure that we give you a better understanding as to how number one you might want to look at earnings season what we're expecting this earnings season from uh from a uh both top and bottom line perspective what strategies can you utilize to trade earnings how can you get a better sense for um how option pricing works around earnings and lastly i wanted to add something new this particular quarter is i wanted to give users a little bit more insight into these the different metrics and the different data points that i look at when i'm trying to gauge whether i believe a company might be beating or potentially missing on earnings for those of you that have followed me on cnbc we do a lot of earnings play so i just wanted to give you a little bit of a glimpse into the type of data points that i look at for engaging a stocks earnings announcement so before we get started what we're going to discuss here today is purely for education and demonstration purposes it is not a solicitation or recommendation to buy or sell any specific securities so we'll start off with our normal q4 earnings preview we'll take a look at what we saw in q3 which was one of the strongest quarters we have ever seen in history in terms of growth compared to the same time previous quarter this is due to the fact obviously due to the pandemic the expectations were fairly low and we had some record beats on hand this month uh for q4 our expectations are pretty high as well uh partially because the bar has been set fairly low here but early reports so far are pointing to a strong beat here then we'll talk a little bit about the option strategies that you can trade around earnings and how option pricing specifically around earnings shifts what parts of the option premiums will shift how can you factor into that when you're when you're modeling that out especially on an earnings announcement and then like i said i want to share with you some of the metrics and data points that are important to me to look at going into an earnings announcement hopefully give you some information that you can utilize the next time you're playing earnings to see if the ideas that you have largely line up with the data points that are available and then we'll try to go through a few examples and try to open this up for q a here at the very end so the primary i would say point that i want to help investors walk away from today's session is really understanding how can you research and trade the earning season but specifically with limited risk using options because earnings season provides a lot of volatility you can try to capture or harvest that volatility by using options but also at the same time you want to make sure you reduce the amount of risk that you take so my name is tony zhang i'm the chief strategist here at options play and i want to share with you the insights that i use for the trade ideas that i present for whether it's to to investors here and members here at options play or for those of you that follow me on cnbc um for those of you that don't know i'm on a show every single friday at 5 30 p.m called options action on cnbc and the fact that we're kicking off earnings season means that over the next three to four weeks you're likely going to see most of the ideas that we're gonna put out here on that show over the next three to four weeks will likely be earnings plays so today what we want to do is we want to talk a little bit about the type of strategies that you'll likely see me utilize on the show they'll show you a little bit as far as the analysis that i would go into with each individual stock to see how they would perform and those are the things that you're going to see here on the show so you're going to get a little bit of a preview for what our expectations here for earning seasons uh for for the upcoming earning season so taking a look at q4 what our expectations are before we do that we're just going to take a look at what we saw last quarter so because this year is the year of a pandemic we don't expect the metrics to line up or grow from the same time last year we saw a decline but that's okay we saw eight percent uh decrease in year over year uh earnings per share but only a 0.4 decline in terms of sales compared to the same time last year i would say that if you look at that top line growth the fact that sales is basically on par with what we saw for q4 in 2019 that really speaks to just the strength of the recovery a lot of investors asking you know how can equity markets be at all-time highs exceeding the february highs the reality is that when you mix what is at the end of the day still a relatively robust corporate revenue perspective with a low interest rates and the quantitative easing we've seen across the board from the fed that's what adds up to the equity markets trading at all-time highs the one thing i will say is that in q3 11 out of all 11 sectors beat the consensus on earnings so we had a very strong earnings record here for q3 68 of all s p 500s beat both top and bottom line meaning they beat the sales expectation and they beat their profit or earnings expectation this was a new record that has been set 68 of all s p 500 stocks it usually averages about 30 37 to 40 percent of stocks will beat both top and bottom line so the fact that 68 of them uh be top and bottom line really speaks to the strength that we have seen in the markets now the problem or i shouldn't say the problem but the one metric that i think is more important than how many stocks beat or what the percentage of beats that we saw was really how have stocks performed after those beats and how did stocks perform after those misses now the previous quarter in q2 one of them one of the major issues that we saw with earnings was that stocks that beat earnings did not move much higher but stocks that missed on earnings had a substantial move to the downside now we still see some of that here this particular quarter but that's not as pronounced stocks that beat on earnings move just only about 30 basis points higher so very small movement so stocks that be barely nudged higher here 0.3 percent and stock that missed certainly moved a little bit lower here about 0.8 percent but that's still relatively okay because last quarter so right now missus what was down about 0.8 percent the previous quarter in q2 the average miss moved 1.5 lower so the fact that that last particular quarter uh you know beats didn't particularly perform very well but misses also didn't particularly perform that poorly you know this is really in my opinion one of the most important metrics is to see how stocks perform going into earnings now q4 so far we have seen in the early reports which predominantly have been banks the earnings have been extremely strong we have seen almost 80 percent of companies beat both top and bottom lines so as i said last quarter it was 68 which was the record now it's very early in the season so the the 80 that we have seen that beat on both top and bottom lines is pretty much restricted to just banking stocks that obviously was a mark was a relatively weak sector of the market so we do expect higher percentage of beats in that particular side of things but right now we're still expecting a 12 reduction in earnings per share compared to the same time last year so compared to q4 of last year we're expecting about a 12 decline in s p 500 earnings compared to that same time and the one thing that we need to remember is that last quarter in q3 the macro data was improving substantially so from july to october during that time economic data coming back were extremely strong employment data manufacturing data across the board we were seeing macro data improving but q4 is really when macro data started to slow down and started to decelerate so we are in an environment for q4 where the macro data or the economic data was starting to slow down due to the rise in covet cases that we saw during q4 this is likely going to put a bit of a damper here on expectations here for quarter for for q4 but the one thing i do want to point out that is from my perspective important to remember is that banks we had seen some record beats from banks but the average bank moved about four percent lower on earnings compared to the s p 500 this is a pretty severe underperformance that we started to see here from banks that had on record on paper a record quarter here so this might lead us to seeing more stocks that that miss or even beat but not actually move any higher so these are some of the concerns that i see going to q4 some of these sectors that we see that scan relatively well based on upward revisions in terms of the company guidance on sales and earnings per share our technology materials and industrials these are the three sectors that that are scanning relatively well uh we're seeing more upward revisions meaning companies revising their expectations in terms of earnings and sales upward the more upward trajectory we tend to have in this specific industry the more likely that sector will outperform that particular sector uh performed during earnings season and the two sectors that we have seen the most downward revisions in terms of company guidance has been in energy and real estate so when we're looking for opportunities in this market going into the into the earnings season it's really important for us to pay attention to this and understand what are our um what are our risks and rewards going into each uh into each uh earnings report and what segments of the market we pay attention to as part of that so let's uh go ahead and take a look at the earnings season coming up now the one thing about trading earnings is that it's important to understand how um how the how the the premium or the value of an option is affected by the earnings announcement itself so you can either buy an option going into earnings or you can sell an option going into earnings so we're going to look at both sides and we'll look at the pros and cons of each one so when we talk about buying options this is when we buy a call or a put option as a simple example of buying options but you can apply them to debit spreads you can apply them to other forms of strategies where you're effectively paying a debit to get into the trade but whenever you're buying an option going into earnings it's you know the the the um the benefit of buying an option is that it has limited risk right whenever you're going into a volatility event like earnings you know that volatility can work against you right you could have the stock make a big move against you and you want to make sure that you have a way to protect yourself one of the ways to do so is by using a limited risk strategy like a long call or a long put however that type of strategy is what i call one step forward two steps back what that means is that you have one potential way to potential you have one way to potentially make money on the trade but you always have two things holding you back and dragging you back and you need to understand all three factors to understand can i make money buying an option going into earnings so what's the one factor that can work in your favor if the stock goes if if you're buying an option and that's if you get a large stock gain or loss on a beat or miss so for example if you think a stock's going to beat earnings right and you buy call option and the stock makes a big jump to the upside that's the one factor that can potentially bring you a profitable trade on that earnings play but in the backdrop of that there are always two things working against you first one is called volatility crush this is really where the implied volatility of an option after earnings will collapse because prior to the earnings event there's a lot of uncertainty so the implied volatility that option naturally is elevated once the earnings report comes out and that uncertainty is gone that implied volatility will naturally come down this typically will happen immediately after the earnings event so that's going to reduce the value of the option that you purchase whenever you purchase a valve an option you want the value of that option to increase in value not decrease but implied volatility coming down will decrease the value of the option that's going to create a drag on the potential on the profit potential that you have if you're along a call or a put going into earnings and the secondary thing that's holding you back or dragging down your profits is time decay time decay of the call or put option that you own will also again reduce the value of the option that you own so you have this one thing that can potentially work in your favor while you have two things constantly dragging down the value of the option that you're purchasing does that make sense everyone please type one into the chat window if that makes sense to you as to the three factors that are at play when you're trading earnings and which two are working against you and which one can potentially work in your favor and keep in mind if let's say you think the stock's going to go higher but instead the stock moves lower on earnings then now you have effectively what is three things working against you so that's really the risk that you're taking with buying an option is that you in a best case scenario you have a big move that works in your favor with two small things dragging you down in a worst case scenario when the stock moves sideways or moves lower then you basically effectively have three things working against you so the only way that you can make money by buying an option going into earnings is if the stock makes a large enough move and the move that it that you've made overcomes the volatility crush and the time decay so if you have let's say a small move then that may not overcome the volatility crush and time decay so you could get the direction right but still lose money on the trade now a lot of investors will say well that doesn't sound like a great recipe right why should i ever do this and it all comes down to the fact that if you're wrong on the trade you have limited risk any of you that have followed earnings here over the past few quarters you've probably seen some spectacular moves to the upside or spectacular moves to the downside the question is what if you're on the wrong side of that trade how do you protect yourself well when you're buying a call or a put you are protected no matter what happens you cannot lose more than the value of the call or put that you purchased okay so that's the that's the one side of the one side of the coin when it comes to buying an option on the flip side you can also sell a premium or sell an option and for this you have what two steps forward and one potentially massive step back um and and i can and i cannot stress enough that massive step back part right so what i'm trying to show you here are the flip side between buying and selling what are the pros and what are the cons so when you're selling an option guess what the two factors that were working against you before when you're buying an option the volatility crush and time decay those two things are always going to work in your favor so you're always going to have these two things work in your favor volatility crush and time decay but when you're short an option if the stock makes a big move in your favor then great you have also a limited risk thing that can potentially work in your favor now remember when you're selling premium or when you're selling an option the potential reward is limited right you can never make more than the premium that you've collected but if the trade goes against you the amount that you can lose is unlimited so if the stock makes a big move against you you can easily offset the gains that you have on these two small things that are working your favor and have all of those gains completely wiped out by one big move against you so that is where the downside to being on the flip side of this where volatility question time decay work in your favor but you're gonna have to take on unlimited risk of the downside so in order to profit from earnings you have to have that the volatility crush and the time decay the amount of capital that you gain or the amount of profit that you gain from volatility crushing time decay do not get offset by a large stock move against you does that make sense to you please type two into the chat window if that makes sense to you and i see david is already getting ahead of me and saying that while you can sell a bull put spread or a bull call spread you're absolutely right david i'm going to get to that here in one second but i just want to first make sure everyone understands you know the two sides of the equation now there are things that we can do to try to limit our risk there are certain things that we can do to try to increase our potential of making profit on that buying the option but i want to make sure that everyone first understands this concept before we introduce the next one okay so i see a lot of twos so let's talk a little bit about these three things right so far we talked about a large stock move we talked about volatility question we talked about time decay now let's put a little let's put some numbers around this let's help you quantify this right now that we understand the concept so this is where we're going to have to introduce greeks now this is by no means a deep dive into greeks this is meant to be a surface level understanding of how greeks play into these three factions i just talked about i do have webinars just on greeks alone so we will reference that in the recordings for those of you that are watching this on youtube um so we have delta we have vega and we have theta those are the three greeks that we're going to refer to so delta refers to the sensitivity of the option with respect to the change in the underlying stock price so if the stock moves higher or lower how much value does the option increase by or decrease by that's what delta tells us so if we or for trading an option with a delta of 0.5 that means for every one dollar that the stock moves the the option will move half as much 50 cents so this tells you the sensitivity of the option with respect to the sensitivity of the underlying stock now for those of you that maybe are new to group option greeks or this is relatively new concept to you or if you're saying to yourself i hate math i don't want to do this math i don't understand the math you're referring to don't worry the options play tool does the calculations for you you don't have to do this i'm only teaching this to you just so you understand the concept the second one is vega which is the change in the underlying price with respect to the change in volatility this is the change in implied volatility or the volatility crush that i'm referring to so every single option has a vega vega tells you how sensitive the option is to changes in implied volatility so if you see an option with a vague of 0.25 that means for every one percent in an implied volatility change the option will either increase or decrease by roughly 25 cents and lastly theta which is the change in the price of the option with respect to 10 with respect to time that's time decay that's the time decay we're referring to so if you see an option with a theta of 0.1 that means for every single day you hold on to that option the option will lose roughly 10 cents in value so this is how you can quantify these three factors if the stock makes a big move how much do you gain or lose from that big move how much should you expect to gain or lose from the volatility crush if you're long or short the option and how much should you expect to gain or lose from time decay if you're long or short the option but again like i said you don't have to know how to do the calculations you just have to understand the concept of it and that's really the most important part so let's talk a little bit about the options strategies that you can trade so before we talked about buying a call or put now there are some major challenges with buying calls or puts and it mostly comes down to the fact that you have volatility crush and time decay to work against you and if you get the direction wrong or if you get the magnitude wrong you're going to lose money on that trade you really need to have a big move you really got the you really have to get the direction dead on and it has to be a big enough move to overcome the volatility crush and time decay so whenever we're trading a long caller put this is only suitable when we expect big big moves in the underlying stock so this is generally reserved for stocks that are more volatile stocks that tend to have big moves so you don't trade these big cap stocks like coca-cola or pepsi those stocks usually don't have big big moves but if you look at you know technology stocks if you look at pharmaceutical stocks you look at energy stocks if you look at anything that's more volatile those are the types of stocks that are more likely to have those big moves so i think the the best call that i made last quarter on this was snapchat snapchat made a big move to the upside as a result of earnings that's an example of one where you could potentially have used a call option to do this now when you use a long call or put you have unlimited profit potential but you are putting a fairly sizable amount of capital at risk when you just outright buy a call or put but the upside is that you have unlimited profit potential on that strategy now for the stocks where perhaps you don't think the stocks gonna make a huge move you don't think the stock's gonna make a big move like a big cap stock maybe apple microsoft amazon these types of stocks you know that they're going to maybe outperform or underperform but usually in the three to five percent realm that's when you might want to use a debit spread this is when you expect more of a modest or slower move this has same this has a limited profit potential but you're going to put a smaller amount of capital at risk so if you're wrong you're risking the less as a percentage of the underlying stock price and i'm going to introduce another one because we talked about the strategy earlier we talked about it uh the time spreads calendar and diagonal spreads last week so i'm going to introduce this as an alternative you might see me or mike on cnbc over the next few weeks use one of these strategies a diagonal is a time spread where you expect more of a modest or slower move this is also has limited profit potential and generally puts a smaller amount of capital at risk and really allows you to play around with volatility as well when you're trading a time spread because you're long a longer date of an option um but you're short your sell your short a shorter dated option that can really help capture some of that volatility crush so a diagonal spread usually will offset some of the volatility crush compared to a debit vertical spread so a risk profile is similar to a debit vertical spread but has slightly less volatility crush than that debit spread now one of the questions that i get asked a lot from investors is how far in advance should you enter a trade before earnings the rule of thumb that we generally have is actually entering the trade fairly close to earnings and exiting relatively cl relatively after earnings as well you generally for an earnings play you don't want to hold on to it for too long but you know each one you might have make some modifications to this rule but this is the general rule of thumb that we have for most earnings plays you don't you certainly don't want to enter an earnings play three weeks before earnings you want to enter just the day of or perhaps the day before for most earnings plays and most of them you don't hold on to them for substantially longer than three to five days on the flip side on more neutral strategies this is for when you expect the stock is not going to make a move at all and there are lots of examples where on earnings the stock just stays put it doesn't move a whole lot um for those you might want to use different strategies such as selling a credit spread shorting a call or put vertical this is a strategy that i actually use quite a bit on earnings especially you know in the current market environment where we're not seeing stocks that beat make a big move to the upside we're seeing much more muted moves this is really where we can take advantage of selling premium but doing so in a way with limited risk that's what david was referring to here before so selling a credit spread gives you limited profit potential but volatility and time decay works in your favor but you know the one thing about the strategy is that you do generally put on a larger amount of capital at risk compared to what you can potentially make in profit potential on that strategy so for those reasons credit spreads suitable for when you have a mild directional view on an underlying stock or etf you generally have a a slightly bullish or bearish view or you have a view that the stock is going to beat or miss so beats you want to sell put credit spreads misses you want to sell call credit spreads which still has a directional factor to it but if you truly believe the stock's not going to move you think it's just going to stay put in theory theoretical terms the best strategy to trade for that is a short strategy but for most investors they're not comfortable taking a short straddle a short straddle because short travels number one require a high amount of capital they have unlimited risk they have unlimited risk in that underlying strategy and that's something that a lot of investors want to avoid so a similar strategy that you can trade that has a risk profile very similar to a short a short strategy is a time spread again a calendar spread if you look at a calendar spread this the calendar spread looks something like this whoops um calendar spread looks usually something like this which is very similar to a short straddle a short straddle that you might see and it has this um it has limited profit potential but the key here is that you have also limited loss potential when you short a straddle you have unlimited loss potential and it requires a high amount of capital when you trade a calendar spread the debit that you pay for the calendar spread that's the most that you can risk so you're actually putting a relatively smaller amount of capital at risk compared to most other strategies but just like the other strategies that we talked about here before generally speaking when you're trading these types of strategies you'd want to enter them one to three days before earnings and you generally want to be out about three to five days after the earnings announcement you generally do not hold on to these strategies for very long so that just gives you a sense for the different options strategies that you can use in your toolbox in order to trade earnings depending on what your overall view of that stock or etf i'm sorry whether that stock is going to miss or beat on earnings whether you think the stock's going to make a big move or or a small move um and i see a question here from richard and this is something i want to address which is really what's a time frame for these types of spreads generally speaking you want to trade earnings you want to pick an expiration that's at least two to three weeks from expiration from the earnings date you generally don't want to trade options that expire the same week as earnings because you do want to give yourself a little bit of time for a trade to work out sometimes you might hold on to a trade for a week week and a half perhaps two weeks but you always want to have the option to do it rather than being forced out of a position at the end of the week when you feel that you need a little bit more time to stay in that particular trade so general rule of thumb with all of these strategies is you generally want to pick an expiration date that's at least two to three weeks from expiration so with that what i do want to then talk a little bit about before we go through some examples is to walk you through some of the data points that are relevant to understanding a little bit more as to whether you believe a stock might be beating or missing on earnings so the one thing i will point out here is that i have four different metrics here that i'm going to walk you through here today there is not a single metric that i look at on its own that is enough for me to definitively or be confident in saying that i believe a stock is going to beat or miss on earnings i really need to see a combination of at least three of these factors lining up for me to confidently say i believe that there's a high degree of pro there's a high probability that this stock might beat on earnings or miss on earnings there's no magic formula here it really is just a mixture and the more of these that you can find or the more factors that you can find working in your favor the more likely that you might see a beat or miss but none of this is a guarantee but this is just gives you a sense for the type of metrics that i deem as important to gauge whether i believe a stock might beat or miss on earnings so the first one i want to point us to is uh just looking at general revenue and earnings trend analysis what you generally want to look for are stocks where the revenue and earnings are trending in relatively the same direction at the as the underlying stock if you're looking for a beat or miss or you want to look for stocks that have diverged from the um revenue and earnings trends so here this is i'm using trading view and i'll show you everyone how to access these charts here but trading view allows you to look at both annually and quarterly income statements in a graph form graph form and what this really just gives you a sense for you know how much has a company grown revenues over the past few quarters and you can also look at annual if you want to look at long term and how has earnings grown over the last few quarters so as you can see here this is for apple here over the past three quarters you can see revenue has grown so has net income profit margins has roughly been flat during that time and as you can see over the past three quarters which is one two three and this is the upcoming earnings during that time as revenues and earnings were grew the stock also moved higher this just confirms now you're not looking for anything specific you just generally want to do a common sense check does the stock relatively line up with what we're seeing the other thing sometimes what we see is that revenue and earnings are relatively flat but you see the stock has gone parabolic you see the stock continues to move higher and higher and higher that also is a bit of discrepancy and that is usually a red flag when you see that when you see a stock clearly outpacing its revenue growth clearly outpacing its earnings growth this perhaps is a stock that's getting a little ahead of itself so these are the types of red flags that you want to look for um before you go out right and say oh i'm bullish on the stock sometimes you just see a stock that's moving really uh you know significantly higher and you're saying oh you know it's it's moving so high i think it's going to continue moving higher but then when you look at the revenues and you see that they've barely grown or maybe they're greatly unprofitable they keep losing money that should be a bit of a warning that should be a bit of a red flag so that's one of the things that i always look for first before anything else is just to get a sense for where revenues where earnings because that is what you're trying to buy a piece of when you buy a company the other thing that i also look at is really you know has the stock outperformed its previous earnings estimates or its um the analyst estimates and and the great thing about trading views they have these great uh they have these really easy to read color coded dots if a stock beats on earnings you get these green dots if they miss on earnings you get these red dots so you can see over the past few quarters has the stock been outperforming the analysts expectations generally speaking we tend to find that stocks that have a pattern of beating and analyst expectations generally tend to continue that and stocks that continue to disappoint or miss on earnings expectations will likely continue that as well um and many times you know analysts takes a bit of time to come back around so sometimes you see stocks that miss on earnings maybe the past three quarters but last time it beat on earnings a lot of times you might see another beat back to back so those are some of the things that we tend to look for when we're just doing that trend and revenue analysis what you're generally trying to see is just you know there's a stock line up with what what they're growing in terms of revenue and sales or is there a large discrepancy large discrepancies mean potential opportunities and they also could potentially mean red flags so those are some of the important things that i look at right off the bat when i'm looking for an earnings expectations and i will put up this chart this link here on your screen for those of you that want to set up a trading view account to set up these things um you can click on that link on your screen to set up a trading view account the second tool i want to show you is estimize this allows me to give you a sense for where are the analysts expectations so as you can see here um you can use trading view to actually see what the whoops what the expected earnings as you can see the analyst expectations here for apples on january 27th is roughly a dollar forty per share in terms of earnings so if you want to dive into that a little bit more there's a service called estimize it's a free service but in order to see uh the consensus in order to see the values you need to create a you need to create your own estimate in order to uh see the data so you have to contribute to the data before you can see the data you can pay to just get access to the data as well but you know as for me i feel perfectly comfortable contributing to it uh providing my estimates providing my views and in exchange i get to see you know what the platform provides and estimize is an interesting tool because what it tells you is what the wall street estimates are in this particular case for apple it's a dollar forty one and it also shows you what everyone on the platform's consensus is so in this particular case the consensus is slightly higher at a dollar forty five versus wall street and estimates is a dollar forty one now i tend to find that stocks where the estimate or the consensus is significantly higher than wall street consensus when the estimized consensus is greatly uh either either higher or lower than wall street consensus that's really where you also have a higher opportunity of a beat or a miss in this particular case you know when the consensus is relatively close to the wall street estimate from my perspective that's less likely to see a big beat so for example if let's say in this particular case let's say the estimate was instead of a dollar 45 let's say it was like a dollar 55 in in that case i would then say okay there's a pretty big differential between what the analysts are expecting and what a lot of users or a lot of analysts um or you know you know when you say an estimate analyst and everyone's an estimate analyst but when the consensus across all those analysts are severely dislocated from where wall street is that also leads to a potential beat here as well it's not right all the time it's not so it's right about 60 65 of the time but again that's why i'm saying all of these metrics you know on their own is not enough for you to to go off of that data and say oh i believe the stock's going to make a big bit beat or miss but when you see a lot of these things line up all at once that's really where you can start making a case for i think i have a pretty high probability of the stock moving higher so estemize is one other service that i use to get a sense for consensus and where the market is compared to that consensus and then what i also look at is relative strength this is a very important thing that i look at is how is the stock performing against its sector going into the earnings announcement we tend to see that stocks that beat on earnings tend to outperform the broader markets or the stocks that miss tend to underperform their sector going into our earnings announcement again this is not a this is not a for sure thing but when i can see a large estimate consensus that's away from analysts and i see that the stock is outperforming the broader markets i see that the revenue growth is largely in line with the stocks growth that that is the type of case that i try to build when i'm looking for a stock that i think is going to beat on earnings so with the trading view charts one of the things that you can do is you can easily take a stock and compare it to the sector so here what i have done is i've taken apple and i've compared it to the technology etf so if this chart moves higher that means apple is outperforming the technology sector so as you can see here apple actually outperformed the sector throughout uh from here and this is pretty much to the beginning of september notice how apple has actually underperformed the sector pretty much or i'm sorry performed on par with the market pretty much since september and only in the past couple of days apple started to come back to life a little so if this starts to continue over the next few days so apple reports on january 27th which is six days from today if i start to see this accelerate to the upside and potentially make a new high that could also be you know one of the things that i look for going into earnings now a lot of investors ask me how do i look at relative strength or how do i look at you know a chart against each other again that's where trading view really comes into play because you can type in any symbol all you have to do is type in the symbol type in forward slash type in the sector that you want to compare it to or the market that you want to compare it to and will instantly create one of these relative strength charts that's one of the things that i use very heavily as part of my trading review chart so i just sent the link for everyone if you want to sign up for account and use the same type of analysis and lastly you know there's always fundamental analysis on the on the company itself i think that's just a given but we also should want to take a look at just the industry itself now this is really where i lean on my brokerage firm's research so i use td ameritrade as my brokerage firm they offer research from cfra which is s p um cap iq morningstar s p all of these uh firms generally regardless of where you trade fidelity schwab merrill td ameritrade you have access to this type of research you just have to go and find it but most of these stocks will provide not only fundamental research on the underlying stock but also fundamental research on the underlying sector or industry you generally want to you know look for stocks that are outperforming its sector but the sector is also outperforming the market for beats and then if you're looking for misses you want to find stocks that are underperforming its sector where the sector itself is also underperforming the broader markets so that's why you know that's how you can increase your probability of finding stocks that are likely going to beat on earnings and stocks that are likely going to miss on earnings now this is really where a lot of different you know depending on where you trade with you're going to get different um resources but this is part of why i prefer to trade at one of the major brokerage firms and not one of the super discount firms because a lot of the super discount firms do not provide this type of research as part of your brokerage services so i find it extremely valuable when i do my research on underlying stocks to get a sense for the fundamentals of the stock as well as the fundamentals of the sector or sub-industry that i'm currently researching so those are the four primary data points that i always have to check off if i'm going to be presenting an idea on cnbc or i'm going to present an idea to our members for earnings well especially if i believe a stock's going to beat or miss these are the data points that i'm looking at on the background to make sure that these things roughly line up and there aren't any huge red flags on this particular front before i put out an idea for earnings and lastly i always use our earnings calendar we've recently made some changes to our earnings calendar for this earnings season that makes a little easier for you to navigate now for anyone who's ever looked at an earnings calendar you know in the bulk of earnings season which is predominantly next week the week after and the week after that those three weeks that's where about 60 to 70 of all s p 500 stocks are going to be reporting over the next three weeks and when you look at any given day there are usually hundreds of stocks that report but from my perspective there are only a handful that are worth trading from an options trading perspective generally speaking they are concentrated from tuesday wednesday thursday and as you can see even though there are hundreds of stocks that report on a given day there are usually only a handful that we consider very liquid so the ones that are green are the ones that are most liquid the ones in yellow are somewhat liquid and anything below that that has no color coding those are the ones that i'm going to stay away from i stay away from anything that's white because that means that they're not liquid at all i'm going to have probably a tough time getting in and out of those trades or get filled at the levels that i want to get filled at you know when i'm trading anything that's in green i know i can pretty much get filled at the midpoint um potentially even better than that midpoint on most of these trades i can get in and out with as little transaction costs as possible that's the most important thing for me when i'm trading earnings the one of the things that we added for this particular quarter is that you now have a before market indicator so any stock as you can see some of the stocks have an asterisk sign next to it like american express other ones like amd do not the ones with the the asterisk sign means that they report before the market the ones without the asterisk signs are the ones that report after the earnings so for any given day the asterisks will be on top so american express freeport macaroon ge johnson and johnson lockheed martin these are stocks going to report before the open on the 26th amd bxp cof these are all going to report after the earnings so we really tried to make this earnings calendar as easy to navigate as possible so that you know exactly what are the the ho the symbols that you want to hone in on and remember because you don't want to enter an earnings play three weeks in advance all of these that are here don't really matter that much because you're not going to enter a trade here in any of these symbols focus your research on these symbols that's how you can reduce the amount of of symbols that you're looking at because at the end of the day you have hundreds of reports you can't possibly keep up with all of them what you generally want to do is just focus on the very liquid ones the ones that you know you're going to be able to get in and out from an options trading perspective so if you find a stock that you like on this list you know you're going to be able to place an options trade on the back of that the worst thing to do is to find a stock that you really love on earnings you really think it's going to beat on earnings or you really think it's going to be a miss on earnings and then find out the options not very liquid and the spreads are really wide and you can't really execute a trade on that we don't want you to waste your time so the ones and the ones in green are the most liquid the twos are are somewhat liquid they're not as liquid so i only look at twos if i've exhausted the full list of ones and i can't find anything that i really like then i'll look at twos but you know in these three days next week tuesday wednesday thursday as you can see i think you'll likely find something within this fairly sizable list of stocks that you will like either that you think are going to beat on earnings or miss on earnings as well so the earnings calendar is available to everyone here within the options play platform um right here at the bottom as you can see there's a link for earnings when you click on that link it will bring you to the earnings calendar and that is what i'm showing you here on your screen here today so with that that covers what i wanted to share with you here today i hope that this was really helpful and giving you a better understanding of how to utilize this platform before we open this up for q a i do want to thank our members for supporting us and allowing us to continue to do this i do want to remind investors that we are doing a members only session tomorrow morning on thematic investing themes of renewable energy i've been getting a lot of requests from investors asking about solar companies about battery technologies we're going to go through all of those things we're going to look at the trends especially with biden's 2 trillion dollar clean energy or climate change build that he wants to spend two trillion dollars in infrastructure and renewable energies in the next four years that's a lot of money flowing into this one industry we want to help you understand what are the opportunities and what are the longer term trends that you can uh capture through that infrastructure build so those are the things we're going to be covering tomorrow morning at 8 30 a.m i hope to see you there for those of you that are members and if you're if you have not signed up for a free trial here for options play if you just heard about us you can sign up for a free trial at optionsplay.com a 30-day free trial and during that free trial you will have access to the members only section as well including the members only webinars just so you can get a glimpse of what's provided to our members before you choose to subscribe so let's just take a look at a quick example here i'm going to look at facebook and i brought up facebook because what's interesting about facebook here and i haven't done all the research just yet but it caught my eye before we jumped on the call here is that as you can see here on facebook facebook stock hasn't moved very much here over the past three quarters or so but if you look at first of all revenue growth revenue growth has actually been pretty strong here q1 17.7 billion q2 18.69 q3 21.47 billion so that's a substantial amount of revenue growth we've seen over the past three quarters but the stock hasn't grown much since then and profitability has also increased not only has net income went from 4.9 billion to 7.8 billion but profit margins have increased from 27 to 36 so all of this leads me to believe that facebook stock has the potential of being higher especially if it continues on this trajectory which you know there's not much to suggest that it's not going to continue on this trajectory and the current estimate for earnings is about three dollars and fifteen cents versus last quarter the estimate was a dollar ninety but it came in at 271 so now at 315 that means that we're expecting higher earnings that's the wall street estimate and then if we look at estimates and we look at facebook so i haven't i haven't actually submitted a an estimate for facebook just yet so let me submit an estimate real quick here let's say 22.7 27 billion here so let's take a look so the wall street estimate is 3.15 the estimate consensus is 3.24 so a little bit higher not much this is not exactly in my opinion a this is this leads me to believe that you might get a small beat here um revenue also largely in line with what um wall street consensus uh for for revenue growth here so from my perspective you know the estimate of revisions here isn't particularly strong one other thing that you can also look at is really you know the velocity of how this has changed over time many times when you see estimate revisions kind of get changed right before in earnings that usually is also a good sign going into earnings but as you can see it's actually fallen a little bit here over the past few days in terms of expectations for earnings per share as well as revenue growth is coming down a little bit over the past uh a few days here so you know that none of this is particularly super attractive but you know when we look at this and we look at facebook relative to the sector one of the poor things that i've noticed here is that it's really underperformed the sector the only thing that has going for it is that if you look at facebook relative to the technology sector it's underperformed quite a bit but it's also bounced off of this support level so you might start to see a little bit of outperformance here for facebook as we've seen here over the past couple of days maybe you think that's going to continue um so on balance facebook isn't in my opinion my top pick here i i'm looking at some other names for cnbc tomorrow and i still haven't found one that i love just yet but this just gives you a sense for the type of of outlook that i have so if i'm looking at facebook you know i would be more inclined to take a more neutral view maybe sell a put vertical here something like a 270 uh 250 maybe uh collecting 7.95 for a 20 point spread that's about 40 percent of the width um that's one way i can play this another one i can do this is take a diagonal a long call diagonal where i might buy the uh maybe the june or may and sell the february uh you know i'll buy the 275 or 280 maybe slightly out of the money and then sell a higher strike maybe about i usually try to sell about a 30 delta or so so maybe a 295 something like that that gives me a risk profile similar to the debit spread as you can see but i'm risking roughly the same amount of capital but this is going to have a little bit more a better return on that on that volatility crush so one of the things that you can do is you can use the p l simulator simulate where you think the stock's going to go but also you always want to vol you always want to simulate the volatility crush so this slider here at the bottom is our volatility crush this tells me how much premium i should expect to collect on the premium on the on the um or how much volatility will affect the value of my option the time slider will tell me how much time decay affects the value of my option and the price slider reflects how much the change in the underlying price will will change the value of my option so this allows me to play around with all of these different variables that affect the value of my option and given the outlook that i might expect on facebook stock maybe i think the stock will get back into the 285 zone get a sense for how that's going to benefit my outlook on the underlying stock so with that you know that just gives you a sense for how you can utilize the tool to look at opportunities that you might find and model what options uh may look like post the earnings event depending on whether the stock moves in your favor or against you but you want to remember you always want to factor into volatility crush i always drag that implied volatility slider slightly lower just just to model the fact that volatility does have an effect on the value of your option post the earnings event so with that thank you so much at this point we'll open this up for q a we have both a chat window and a q a window if you could please bring up your q a window which is at the bottom of your screen i will be answering questions out of just the q a window there so let's take a look a teef is saying all option types call put and debit spreads calendar or tools in the toolbox if you don't mind listing pros and cons of these strategy for events learning when to place them um so atif i actually have done a strategy session with tom souzanov on just that um you can send us an email at info optionsplay.com or you can go on youtube and find that um that that video i'll send you a link to our youtube channel so that you can look that up but we have built some of these strategy i would say sessions to help you better understand how to access them so let me just give you the link to our youtube channel i'll post the posted the link into the chat window for those of you that are interested in our youtube channel that's where all of our recordings are that's where all the videos that we produce are so please take a look at that um as with respect to the uh the videos and the recordings for all of the sessions that we produce uh mohammed is where do we get historical quarter earnings of the market as you've shown in the first page of your presentation mohamed i don't know where you can get it this is on the institutional research that we read that we have access to i don't know how you would necessarily get access to it to be perfectly honest but that's why we do these sessions every single quarter before the earnings season kicks off so that you have access to this information um before you you start trading earnings and so you understand where the market currently sits where what the market expects and how the market has roughly reacted to earnings in the previous quarter um weekly butterflies on both sides long short day prior to the high iv then crush david i'm not sure i understand that question if you don't mind rephrasing that i'm happy to try to answer your question sid is saying uh citizen i understand call spreads well but i'm having trouble internalizing how put spreads work can you suggest a good way to think about put spreads please so sid um i highly recommend you to watch our youtube channel look at i don't know if you're talking about credit or debit spreads but we have both um pull up a video on credit and debits rise we cover both they're really just mirror images of each other so if you understand call spreads very well that's just for stocks that you think are going to go higher put spreads are just the opposite for those first stocks that you think are going to make a big move to the downside um but i but please take a look at the um the the youtube videos that we have um rick is saying i have had success in using short strangles prior to earnings what's your view on this strategy prior to earning so rick sure triangles are one of the most effective strategies going into an earnings event but because first of all you have two time decays and two volatility crushes working in your favor and what you're sort of doing is you're offsetting some of the risk here because one side is obviously going to work in your favor so rick is saying you know shorting a strangle here and you probably go a little wider here something like this and basically what you have is you have two short strikes so you have two time decays work in your favor two volatility crushes working in your favor and only one potential trade working against you if the stock makes a big move where the st where the the other side of the trade will obviously work in your favor so short strangles is one of the most effective strategies going into earnings but the one thing is that number one it requires a high amount of capital and number two it does have unlimited risk if the stock makes a big move to the upside you can have a large loss here to the downside so you know in the long run if you constantly sell straddles strangles going into earnings can you be profitable in it that's likely one of the most profitable strategies in the long run but you can take on some pretty severe short-term pain doing that um so you need to generally have a large amount of capital to short strangles going into earnings how many days how many days after earnings before putting cover call back on apple from my perspective james as soon as the earnings event is over you can get back into selling cover calls uh krishna saying hi i'm not getting any of the options played daily play emails so krishna if you don't mind send us an email at info optionsplay.com um but the daily play emails are always sent out at 6 00 a.m so but if you're getting the other emails i'm surprised that you're not getting this so please send us an email at info optionsplay.com i'll post that link uh we'll post that into the chat window um send us an email and we'll take a look at that for you what's your view on iron condors or iron flies for earnings so i'm not a big fan of iron condors and iron flies for earnings because you have to hold them to expiration you know um i i i'm not a big fan of holding things to expiration there's a lot of risk in doing so i usually roll things out pretty early and you know as far as iron condors go it's kind of a scratch for me you know in terms of iron condors the the amount of capital that you can potentially make versus the amount of capital that you can lose it's kind of a flip of a coin 50 50. you know in the long run i don't see a lot of value in trading iron condors because you know you're basically saying you think that the stock's never going to move and it's going to stay within a range i don't have any magic indicator or technical indicators that tell me the stock's going to stay in a range so i find that it's kind of a coin flip and i i don't love trading coin flips so for those reasons i don't love trading iron condors i do sometimes like into an iron condor because i have a directional view so for example if facebook is range bound when it rain when it hits the bottom of the range i might sell a put credit spread and maybe a couple of days later the stock makes a big rally like this and it's starting to roll over again i might sell a call credit spread and the two combined end up in an iron condor for those times i will end up an encounter but you know i'm not usually in those very long i certainly don't enter an iron condor with the with the hope that the stock is going to stay within a specific range uh tony how do you look at p e ratio how do you interpret that so i i'll be honest i don't look at p e ratios too heavily i only look at them in comparison to other stocks so for example i'm looking at facebook and facebook is trading at 30 times earnings i look at other stocks within this particular sub industry like google um you know what is that trading at that gives you a sense for whether stocks are cheap or expensive but you know i'm not generally speaking a very long term investor so valuations are not as important to me so as you can see google and facebook largely similar type companies in terms of they generate almost entirely their entire revenue from ad revenue so google trades at 37 times earnings facebook trades at 30 times earning facebook is clearly cheaper here that's how i use it i don't really think look at it much more than that uh hi tony do you still do noon or daytime monday sessions um so we're going to be starting up canadian sessions again here in just a couple of weeks so look out for that but yes i am going to be starting back here in canada in 2021 why do companies that make that make or beat estimates go down after earnings are released sometimes um ron there are a lot of different reasons it usually comes down to company guidance right so for example um i think uh probably morgan stanley is a good example of this morgan stanley just released earnings came out substantially better than expected they blew out earnings blew out um our revenues and the stock still went went lower it's really due to the fact that the company guided that the fact that in 2021 they still see a large amount of uncertainty that puts a lot more weight behind where the stock moves going forward so just because the stock beats does not mean the stock has to move higher my question regarding the cannabis etf nj i'm not sure what the question is um for neutral strategies in lieu of a calendar substitute a butterfly for the straddle um so i'm not a big fan of butterflies either because largely you've you've basically negated all of the benefits sorry you've negated all the benefits of a butterfly by having to pay for those two wings here so you know so for example when i use a a short straddle the break-even point is between 67 and 82 that's a pretty wide range once i turn into a butterfly the range is now between 73 and 76. so here i had about a 15 wide break-even point here i only have a three dollar wide break-even point it pretty much negates the whole point of of us of a short straddle by trading a butterfly so for those reasons that's why i also do not like butterflies butterflies are basically a coin flip it's a very low probability low risk coin flip um you know and once in a while you hit it on the jackpot it's like kind of winning um roulette at the casino you know you have a low probability win but when you win you win a whole lot and it's just not the type of trade that i love because i certainly don't have some magic eight ball that says i think this stock's going to be at this exact price on this exact date because that's exactly what you need to hit when you're trading a butterfly i don't have that crystal ball maybe someone else does maybe someone else has some magic formula for that um but you know i'll leave it for those people to trade butterflies uh what's your outlook on zoom so you know we do rapid fire sessions every single every other friday so i recommend that you join us for that you know my general consensus on zoom is that i quite still like it in the current market environment i think that the ryzen coveted cases has provided a bit of a floor here for zoom i don't think it's going to be a big mover here to the upside it's very clearly still in this downtrend here i'd like to see a breakout before i'd say i'm bullish on zoom but you might get that on the next earnings report but that's not for another 41 days here um why are you still holding c after earnings well ernest if you you might have read my mind but we are closing out uh city group here today so that's going to be the alert for tomorrow morning uh when do you open the trade on earnings a day before uh yeah so usually the day before the day of if it's an afternoon earnings are usually suitable start uh usually good points for entering a earnings play thomas is asking what do you call the trade when you sell to open a put and then buy to open a put on the same stock sell a put and buy a put on the same stock um yeah so that would be a vertical i just don't know if you're referring to a credit vertical or a debit vertical but those are just considered put spreads but you can either trade them for a credit or debit if you want to go to our youtube channel we actually have a video on comparing debit versus credit spreads that i actually just did fairly recently so if you want to learn more about the differences between those two thomas i highly recommend you to take a look at the youtube video for that is there a way to display an earnings date on your charts um yeah so there's an earnings date on the bottom of every single chart here on options play you type in any symbol and you will see the earnings date here at the very bottom which is down here whoops right down here jim is saying when you are using the earnings analysis for a trade idea of how far past earnings date do you usually target one week one month how far when you're using the earnings analysis for trade idea how far past the earnings date you usually target oh so usually about a few days to about a week is usually a good starting point so for example if apple reports earnings on january 27th i would usually look at um you know sorry i would usually look at january maybe uh 31st or february first or second you know that's usually the time frame on which i would look for um getting out at my target price how much do you genera generally estimate for volatility changes around earnings great question wayne is asking how much do i factor a move in volatility the answer is there's no exact signs for this but generally speaking i think moving halfway between where it currently is to the bottom of the range is usually a good starting point to estimate the volatility crush but at the end of the day like i said there's no uh true number that you can point to you could potentially look at volatility crushes from previous earnings and averaged that out but again i tend to find that halfway is usually a pretty good starting point can i see the next date below the chart i'm not sure what you mean by the next date mitchell if you don't mind clarifying the next date of what if you want to do a call spread what do you recommend the debit should be relative to the spread um you know you tend to find that somewhere between two to one to four to four to one is usually the sweet spot for a debit spread here um so for example here is you know 658 to 1342 that's about two and a half to one a little over two to one here um you know if you move to something like this you'll see closer to two and a half to one if you do something like this you might see closer to let's see you know i tend to find about two to one three to one is usually the range at which of what you're paying versus the potential reward on a debit spread william is saying can you comment on the options place score i believe 100 is the desired goal to be considered a viable trade does it make sense to tweak choices strikes to get a better score so here's the thing right you can tweak the strikes and if you go from you know 1 104 to 107 the reality is that these are not that different from each other what you generally want to do is just avoid really bad scores if you will um but what you don't want to do is you know the difference between an 89 and like a 87 is basically negligible um you know what you generally want to first focus on is the directional view do you have the right directional view because the options play score does not factor into direction you have to have a directional view the options play score is unbiased to direction so you have to first make sure that you're trading in the directional view and largely you don't need to optimize around the options by score what you just want to know is is the options play score below 80 or not which is red if it's below 80 that means the risk reward is not particularly great but and what you'll generally find is that when you make changes to it it's not going to jump from you know 79 to 103. that just doesn't happen it just tells you that buying call options on apple is relatively expensive and it doesn't really matter which option you choose um they're all pretty expensive here um but you know the difference between 77 and 73 is fairly negligible is just to give you a better sense for how to use this positive and negative vega 2 please um doug i'm not sure if that's a question if you don't mind phrasing that in a question i'm happy to answer that alex saying thank you for all the useful information how do you choose your strikes on a call debit spread so alex you know the great thing is that the options play platform does it for you based on what we teach which is buying the 50 delta selling the roughly 25 delta and you can you know change the expiration date and we'll automatically adjust it for you so if you want to change it to the june's we'll always buy roughly the 25 delta the 50 delta and roughly sell the 20 delta here for you so options play does it for you um in finding the optimal debit spread uh can you recommend a group or company for futures trading that i can trade with um if you're referring to a brokerage firm that you can trade futures trading with i would say tastytrade is one of the better ones that i could recommend i'm going to be doing some education with tastytrade coming up as well on on futures education i just posted a link into the chat window if you want to open up a tastyworks account i think they do a great amount of education and i will be doing some education with tastyworks as well on some of the new futures products that are coming out jamil is saying uh would you mind walking through the take two trade that you posted why is a put vertical strategy more advantageous than other bullish strategies so jamil um it really comes down to the fact that um you know selling premium gives you the advantage of making money even if the stock doesn't move substantially higher uh the downside to trading a debit spread is that i can actually have the stock move higher um so this take two's at 205 the stock moves modestly to 212 as you can see guess what i'm still losing money on the trade on another type of spread um if i bought a call option i'm losing four hundred dollars if i bought a call spread i'm losing 135 by selling the put spread i can make money even if the stock just moves a little bit higher even though the stock doesn't move higher even if it just stays at 205 i'm sorry this is a 210 point let me change this um to 200 put even if the stock stays where it is and doesn't move i can still collect the premium here versus if i bought a call or call spread i'm gonna lose money so that's the benefit of selling a put spread versus other bullish strategies andy's saying i'm new here what's your favorite book for learning options um great question so uh one of the books that i really love is for beginners is understanding options on the second edition by uh by someone uh named michael sincere who actually is an options play subscriber um i just posted a link into the chat window with the um the link to the book it's understanding options the second edition great book for those of you that are looking to learn a little bit more about options uh if you have any strangle two days ago on netflix you would still be in the red um not sure that that's a question um [Music] ken hi tony can i download the earnings calendar in excel where can i get it so again your earnings calendar is on your uh options play platform when you click on the earnings link here at the bottom it'll bring up the excel spreadsheet and yes you can download it if you like but i don't recommend it because earnings calendar shifts all the time if you just have a snapshot what you might be looking at may not be relevant tomorrow or a week from today so make sure that you use the earnings calendar because we update this every single day what's your view on zero date expiration options play on indices jag it's the strategy that we call picking up pennies in front of us a a a freight train um jag is asking what if i just sell options are about to expire um tomorrow or today it has very little probability it has very high probability of success the answer is that you know you can do it and this is something i'll show you here real quick just to give you an understanding as to what jack is referring to here he's referring to selling something like this um and and this is this is just me being a little creative here and saying this is what he's doing i don't know that he's actually doing this but something like this as you can see very high probability of profit and this is doing something that expires just let's say um in a few days in this particular case this is expiring tomorrow i sell a really far out of the money put here um you know you have very high probability of success a lot of investors kind of love this type of stuff let me just try to show you what this looks like here's an example of one i'll saw the 1300 put buy back to 29.80 put i'm going to collect 10 uh but i'm risking 1990 and you're basically saying i don't think you know i don't think ndx is going to get below 13 000 by uh you know tomorrow so you know i have a 99.91 chance of winning that sounds great here's the thing is that you never know what can happen right and if you collect ten dollars every single few days and maybe you trade a lot of you know ten contracts of this and that's a hundred dollars whatever it is that you that you end up trading um you know many investors will say i'll take a hundred bucks a day if i sell this type if i sell 10 contracts with this every single day the answer is sure you can do that and the the one thing that we have learned when you've been in this business long enough is that this strategy will work month after month until it doesn't um and you might collect a hundred dollars a day every single day and then it just takes one day where you know you end up with that 23 000 loss as you can see here that's going to wipe out months if not years of previous gains that's what's that is what is going to happen it's not even if it's going to happen it's a matter of of when not if the second thing is that whether you become profitable long term in this particular strategy is solely dependent on when you start the strategy if you started the strategy in 2010 you would have been just okay but let's say you started this strategy in january of 2020 the coronavirus sell-off would have destroyed the strategy week after week and you would have tried to try to get yourself back to break even on these trades and you would have been wiped out multiple times within just a few weeks and for those and the thing is that you know on the give backs right when the stock makes a big move to the downside you lose twenty three thousand dollars on the next day when you do it and the market roars back guess what you're not going to make twenty three thousand dollar back we're still going to make just a hundred dollars on that trade so that's why this trade is what we call picking up pennies in front of a steam steamroller if you were lucky enough to start the strategy in 2010 you might have been okay but most people were not that lucky people who started this in 2019 in early 2020 had their asses handed to them in february of 2020 so that's just sheer luck as to when you discovered the strategy and when you started the strategy and i don't love trading strategies that depend on sheer luck in order to make money so that's my view on that strategy um neutral earnings outlook when strategies neutral earnings outlook what strategies would you recommend um tudor this is something that i covered in my in my webinar so if you maybe i don't know if you missed it but we actually have this whole mutual strategy short put vertical and calendar spreads are the two strategies that you would generally trade when you are neutral how do you close your strangle um jack if you don't know how to close a strangle i recommend that you call your brokerage firm they'll be able to walk you through each broker firm is a little different from each other but most brokerage firms have a close button you simply have to select your strangle click on close and it'll pre-populate a ticket for you to close your strangle derek is saying someone else asked but i don't think it was answered can you cover positive and negative theta um sure positive and negative theta just tells you whether you're earning money or losing money each day so positive theta means that you're generally earning money uh negative theta means you're losing money every single day that's it what percentage up or down do you take profits um cal that depends on the strategy so i actually cover each individual strategy in on my youtube channel so uh the rules are slightly are pretty are different for uh you know debit spreads are pretty straightforward you cut losses at fifty percent start taking profits at about 75 to 100 gain credit spreads it gets a little dicier because it depends on how much credit you receive calendars and diagonals largely fall under the same rules as debit spreads but it is it does differ from strategy to strategy so i recommend you to take a look at our youtube channel i do cover each strategy and generally what are the rules for managing these trades would you particular would you protect the strangle with the stop loss trade um i don't believe in trading anything without a stop loss to be perfectly honest so i certainly would recommend that uh but that's me not everyone does i you know i'm not the type of person that has time to look at my trading screens all day long i put on a trade i'll put a stop loss on i'll put a limit order on i know i'm protected on both sides this way i can do my job and not feel stressed i have to look at my screen every five seconds to know whether i've you know needs to cut my losses or move on do you use chart trend lines ways fibonacci action to determine what you want to trade richard i generally do not i'm not a big fan of things that are subjective you know when you look at a trend line here uh you know five people looking at the same chart trying to draw a trend line we'll draw five different lines here i only like horizontal lines because they're not subjective right so for example a horizontal line like this it's really not subjective three people looking at the same chart will draw the same horizontal line when you draw fib lines you know there are so many things to determine you know where do you start your fib line do you start at you know the wick you use the body and they're all going to give you different views so i don't love things that have a lot of subjectivity built into it um you know moving averages is a better trend line in my opinion because there's no subjectivity into a moving average a 200-day moving average is a 200-day moving average if we if five of us look at the same chart with the 200-day moving average we're all going to look at the same trend line so i prefer things that don't have subjectivity built into it the more objectivity you can have in something that you use for your charting the more likely you're going to be able to be consistent with it the more subjective something is then less consistent you're going to be within that's the one thing i've learned from being from from doing technical analysis for the past 15 years any strategies to save the possible short call being exercised on a poor man's cover call around earnings uh i don't know what you mean by how do you save something from being exercised it's either going to be exercise or not exercise there's nothing you have that you can control other than rolling your call so we always tell users never hold your positions to expiration so if you're approaching expiration about two to three weeks out especially on a poor man's cover call you want to get out of the call option and roll it to a later month to avoid exercise that's the only way to avoid exercise is to roll out your call two to three weeks in advance before expiration uh srikanta saying hey tony i'm new to options and i am interested about debit spreads i'm curious to know whether the option greeks delta gamma theta and vega cancel out each other by side and sell side no they do not um they offset each other but they certainly do not cancel each other so they should not have to get impacted implied volatility time decay uh no shakan they offset each other but they do not cancel each other out the long leg is always going to have more delta more gamma more theta more more vega than the short leg the short leg because it's out of the money will always have a smaller greek value than the long leg on the debit spread can i check the ratio of trading against earnings on an underlying stock in your options play platform i don't know what you mean by the ratio of trading against earnings uh manesh if you could answer that question i'm happy to answer that question uh do you consider a weak technical s example fib rated three week uh yeah so facebook is weak because look this is facebook compared to its sector look at how much it has underperformed the sector that's why it's a weak stock facebook even compared to the sp even compared to the s p 500 significant weakness in this particular stock over the past couple of months this is largely due to the anti-monopoly redick rhetoric that we have heard from facebook here you know this is one of the reasons why it's one of the weakest stocks in the market is the eye volatility of factoring your decision for transaction um and is the implied volatility factor in the decision for your transaction yes it is jack um you know i didn't get a chance to get into that because that gets into some more nitty gritty but you know especially when there's a huge amount of high implied volatility that may uh j that may justify selling selling options if volatility is extremely cheap that may imply buying options and especially when you have a large differential in implied volatility that's when you might want to trade time spreads but yes implied volatility certainly is a factor in choosing a strategy tony is saying how do you factor in a foreign stocks worth vis-a-vis foreign exchange um so tony um a foreign exchange stock is already priced in u.s dollars when it's listed on a u.s exchange so you don't have to worry about that what you have to worry about is how much revenue they generate in foreign currency and when they have to repatriate back that back what type of fx risk that they're taking you know that gets into some really severe uh so it's pretty deep analysis so i i don't know honestly tony how to help you on that because unless you are willing to dig in roll your sleeves up and do the math yourself i don't know how else you'd be able to to factor that in um how far in advance of earnings date does iv increase um barry i would say that the implied volatility increases slowly over about a month's time going into earnings and then collapses instantly uh the second that the earnings announcement comes out uh me is saying which we which week you select your strikes how far out how uh for put credit spreads which week you select your strikes um so usually we select uh expiration dates that are about three two to three weeks out from expiration um and as far as selecting your strike prices if you're talking about a put credit spread we always sell the 50 delta which is the at the money put and then we buy back the 25 delta which is the 20 which is uh an out of the money call output what about x dividend date on the chart we also have dividends here um if there's an ex dividend date coming up you'll see the date here but as you can see i don't have the next ex-dividend date here for apple that's confirmed which is why you don't see a date here totally missed your gm pick this week um so dennis we're adjusting our price here on that gm short put i know that you could not have gotten filled at two dollars and ninety cents i think the opening was two dollars and seventeen cents on that gm trade which money flow indicator do you use i use chicken money flow um which is cmf on trading view but uh from my perspective you know i don't know that there's a huge difference between any of the money flows uh where can i find the past few vault crushes for any stock jay you're going to have to subscribe to some kind of service that gives you historical implied volatility data in order to do that you know if you use a platform like think or swim that data is available on the thinkorswim platform otherwise you do have to subscribe to a service that sells that data i don't uh jack is saying i don't understand your statement about optionsplay does not have a directional view since you have full sets of bullish and bearish trade suggestions jack i didn't say that options play doesn't have a directional view i said the options place score does not have a directional view the options play score does not factor into whether we believe apple's going to go higher or lower it only looks at the risk reward of each strategy without factoring into a directional view that's not to say that options play as a firm and myself does not have a directional view if the options if option score is directional sensitive then does not does not disproportionately affect straddles um dennis the options play score is not directionally sensitive that's what i was trying to say before what are the factors that go into producing the options place score it is proprietary to us but what it's telling you is really how much green is there in this particular chart meaning how much potential is there for reward versus how much potential is there for risk and how much reward is there and how much risk there is so in this particular case you can see a lot more reward than risk but a higher probability of of of risk because as you can see there's a lot more there's a little bit more red than green so the question is how how big is the ratio between that red to green the bigger the ratio in terms of green to red the higher the options place for the smaller the ratio of green to red the lower the options play score but it is a proprietary calculation that we use can you please look at unp and comment please uh so aggie you know i haven't looked at this on earnings so i really don't have a whole lot to comment on that i know ump is one that i liked um but i haven't had a chance to take a look at it so it's really difficult for me to comment on that um looks like unp is down about four percent after hours um so from my perspective you know the the line in the sand here is around 210 it's at 207.90 i wouldn't be too concerned i would probably expect that ump will likely trade back up above 210 here so it is still roughly in line with with my expectation that's going to hold the 210 level i'd like to see if that will come back here over the next couple of days above that 210 um you know i would look at selling that 210 uh 200 foot spread here on unp uh andy you're very welcome on answering your question um uh richard um i i don't know i i'm i don't know as far as what other companies trades futures i mean there's lots of them i i certainly don't particularly have one that i can recommend uh so here's a good question sir sir naf is asking options play score for mu is bullish for 105 bearish is 125 which is better so this is what i mean the options play score does not have a directional view just because the puts are a little cheaper as you can see the higher options play score 120 that means the put spread here is relatively inexpensive the call options are a little bit more expensive at 105. which one's better the answer is what's your directional view on mu if you believe mu is going to go higher it doesn't matter how cheap the option the put options are you're going to lose money on the puts if you think apples are if you think uh micron is going to go higher so the answer is very simple buy the strategy that you think lines up with the directional view that you have on the stock it doesn't matter how how cheap calls or puts are because you're never going to trade puts if you think the stocks are going to go higher you're never going to trade calls if you think the stock's going to go lower the option swipe score simply tells you the risk for reward but just because something is as cheap or has good risk to reward does not mean you should trade it you still have to factor your own directional view into it um eric you asked sorry what strategy was that with huge risk i don't know what you're referring to so if you could refer back to which question that you're referring to can you please look at unp i think i just answered that question here jack was saying it was not how to close the strangle but when after earnings ah i see um like i said generally speaking three to five days after earnings is a good starting point for closing your strategies here but you know that kind of depends on what your views are you could hold it closer to expiration each one's each scenario is a little different but generally three to five days after earnings is a good starting point um what is gamma used for gamma tells you the sensitivity of delta to the changes in the underlying price so juan i actually have a video on youtube for option greeks so if you want to learn more about gamma you can learn about it using uh using that youtube video uh mike is saying what best option strategy will use if earnings is coming out in a week with high iv and the current trend is up so you know i would say that if you think that stock's going to continue to move higher and the iv is very high selling a credit spread is a good starting point um or trade a diagonal spread those are the two that i would generally lean as a starting point for something with high iv trending higher that you think is going to continue trending higher to use the stop loss on a credit spread i absolutely do uh usually you know i usually sell try to sell credit spreads where i'm collecting at least 40 percent of the width so i'll usually set up a stop loss at about eighty percent of the width um as my stop loss and as the trade starts to work on my favor i'll lower my stop losses as well so i'll trail my stop losses down so i'm taking on less risk on each trade especially as the start start as the trade starts to move in my favor on a credit spread what delta would you be looking for selling and buying on credit spread oh so on a credit spread you buy the you sell the 50 delta and you buy back the 25 delta on a credit spread mike is asking which mark with market is so bullish and lots of people talking about a bubble what option strategy is the best of trading spy um mike that depends on what your views are just because lots of people are talking about it doesn't mean that that's what your views are so if you think the stock market is going to somehow collapse buy puts very simple um but you know just because we're in a bubble doesn't mean the markets are going to collapse and bubbles can't you know just because we're in a bubble doesn't mean the bubble can't get larger amir is saying what indicators in trading view are you looking um so i use a 200-day moving average i also use a envelope a 21 20 day exponential moving average i use an rsi a very standard a 14 period rsi and i use a chicken money flow how far back in time do you deter do you look to determine if iv is high or low roger we usually look back about a year to determine whether implied volatility is high or low why are you still in the paypal trade than your best practices um where is paypal uh it has not reached our take profit level our take private level is 50 is now only at 41 so that's why we have not taken profit here on paypal yet is iron condor good for earnings i don't particularly think so i don't see a good reason why iron condors are great for earnings the same reason why i don't think butterflies are great for earnings do you follow cot reports and what source do you use i'm not a future trader so i don't follow cot reports and the cot is the um is the source for those so there isn't multiple sources for cot reports um a tiff your question about can you please a rash can you please explain rationale option spreads where one leg is half dollar and the leg is full dollar i don't know what you mean by half dollar in full dollar if you don't mind clarifying um junaid is saying i bought majorna using options play score 112 a couple of days ago so which score number is excellent to trade anything above 100 is a good options play score but the options place score is only telling you the risk reward ratio i mean you still need moderna to move in your favor in order to be profitable but you have a relatively inexpensive option which skews the probability in your favor when you trade something that's relatively cheap or expensive um okay so i've really tried to answer as many questions as possible i couldn't get to all of them but i really tried to get through as many as possible um but i want to thank everyone for taking the time out here this afternoon i really hope that you guys find this useful and giving you a better understanding as to how to navigate earnings season hopefully this gave you a little bit of insight into how i look at these ideas and i present them on cnbc what are the kind of the background information that i'm researching and hopefully this gives you a little insight in some tools that you can use for your earnings place as well so with that thank you so much we'll send this recording to you as soon as we finish processing processing this and i'll see you guys tomorrow morning at 8 30 in the morning where we're going to be covering renewable energy companies so really looking forward to that and hoping to see many of you there tomorrow morning thank you so much and have a great night

Channel: OptionsPlay

Views: 61,339

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Keywords: trade earnings, how to trade earnings, how to trade earnings with options, how to trade stock earnings

Id: SHMxtOGSIJg

Length: 95min 28sec (5728 seconds)

Published: Thu Jan 21 2021