Options Strategies For Earnings Announcements

so there are a large number of professional options traders who focus on profit opportunities around earnings or leases of stocks that they follow options follows certain fairly predictable patterns around earnings releases that can result in opportunities for traders who are looking to take advantage of the unique behavior of options near earnings or leases the problem is that it's basically impossible to predict which way a stock will move after earnings in a legal way anyway and so you might be asking how can you possibly make money trading options on companies about to release their earnings reports when the positive or negative nature of the release is impossible to predict and more importantly the markets reaction to those earnings releases essentially can't be predicted either add to that the extremely dangerous fact that if you somehow do try to predict the markets reaction to a company's earnings report and you end up being wrong you're virtually guaranteed to take a large loss as the market's reaction to an earnings report for any company is usually a much larger price movement than usual for that equity the good news is that there is in fact a way to take advantage of earnings releases through trading options without actually having to expose your account to the earnings event itself and the tremendous risk that those releases carries so if you're wondering how you can possibly make solid high return wins on options trades around earnings without actually exposing yourself to the risk of the earnings releases themselves then I'd suggest you stick around because I think you're gonna learn something very valuable in this video [Music] hi I'm Seth Freiburg and I'm the head trader of SMB capitals options trading desk SMB capital is a proprietary trading firm located in midtown Manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in New York City you want to click our subscribe button right now so that you don't miss any of our free trading videos produced for the trading and investing community so what I wanted to cover with you today involves the fact that options have an element to their pricing that no other financial instrument has and that is what is known as the time premium that is embedded in an options price that time premium can change price for many reasons one of the major reasons that an options time premium will change dramatically is if there's some kind of an event coming up that's likely to cause the stock to make a large price move in one direction or another in earnings release is the best example of such a company specific event so what happens with options pricing is that as you approach earnings the time premium the options for that stock start to gain a lot of value as the risk to the sellers of those options is starting to get really extreme now let's take a look at alphabet options also known as Google options and how they've traded around earnings to illustrate my point so Google stock was trading at about 1200 in March so here we've gotten options chained for Google options on March 26th which is 34 days away from the Google earnings release these options will expire in five days and as you can see the options with a strike price of 1225 which are 25 points above the market are trading at three dollars and 86 cents so basically the buyer of the option will break even on the trade if the market moves up 25 points plus the option premium of 386 so if you do the math the stock would have to move up over 29 points for the buyer of the stock to break-even now let's move ahead 34 days to one hour before the Google April earnings released on April 29th now at this point Google's trading at twelve seventy 450 and so looking at the options chain expiring five days later the call options trading about 25 points above the market price is the 1300 call and as you can see that one is trading at ten dollars and ninety cents so in other words the buyer of the call option will only break even if Google moves up over 36 points before the options expire so comparing the two options chains on options that expire five days later the calls twenty-five points above the money are way more expensive one hour from the earnings release compared to the options 34 days out and that is because there's a much larger chance of the call 25 points above the money being reached five days later if earnings are imminent compared to a random day 34 days earlier when earnings are not looming when there's no major price moving event coming up basically the market is charging triple its normal prices because of the proximity and time to the earnings released so in options terms that means that the options close to expiration contain a much larger implied volatility than the options 34 days earlier it's called implied volatility because the market price being so much higher implies that the risk of a larger move is much higher and that risk is getting priced into the options in a big way before we get into a specific example of how to trade this phenomenon which is an earnings play on alphabet stock I wanted to mention that we're currently running a two our free intensive workshop at the moment then you should check out the free options class that we're currently running just go ahead and click the link that should be appearing now at the top right hand corner of your screen that will open up the free registration page in a new window or you could just go ahead on over to options class com to register for this free intensive workshop it's a rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it okay so let's take a look at how we can exploit this property of options as they approach earnings in other words how we can exploit that blow up and implied volatility which takes place so let's take a look back at April 30th looking at the morning after Google released its earnings report as you can see Google dropped over 100 points because the market was obviously disappointed by the internet release now there is a tendency for certain stocks to anticipate that a stock will react to a release the same way that it did to the previous earnings release in other words there's kind of a recency bias as to upcoming earnings releases for certain stocks some stocks have this tendency and others don't and there are actually scans available to discover stocks which in fact have this tendency so if Google was such a stock then that tendency gives rise to an options play exploiting this so let's move forward now to July 11th which is 16 days before the next earnings release which is on July 24th now as you could see Google is trading at 11:43 now what I'd like you to do is to look at the at the money option expiring in two days you'll see that it is trading for 3.24 cents so let's keep that in mind as we enter our options trade around Google's upcoming July 24th earnings report so now let's say that we have identified through our scans that Google is one of those stocks that tends to sell off before earnings if the previous earnings report caused a substantial downward gap so with that thesis we're going to buy to Google puts at about 10 points below the market at 11:30 250 on the options chain that expires two days after Google's earnings are released we intentionally pick the option seen that expired after earnings because we wanted those options to be affected by the fact that earnings are coming up if we bought options that expired before the earnings were released the earnings release would have very little if any effect on the pricing obviously as they won't be exposed to the big move that usually comes at earnings now you'll see the cost of those puts that we bought is twelve dollars and 19 cents and we bought two of those so the total cost of those options is four thousand and thirty eight dollars because each options contract represents 100 shares of stock so the cost is multiplied by hundred to arrive at this total final cost to the trader okay so now let's move forward to a few minutes before the earnings or at least two weeks later as you can see has indeed sold down to 11:30 to an 11-point drop from when we first entered the trade two weeks earlier so our thesis worked out but what I want you to focus on is what has happened to the value of our eleven thirty two point five options which are now basically at the money now notice that we're two days before expiration of these options and these at the money options are now worth twenty six dollars and eighty six cents now remember that I asked you to keep in mind the value of the at the money options two days from expiration on the day we first entered the trade the at the money options two days from options expiration on July 11th one when he entered the trade were worth three dollars and twenty four cents well now two days before options expiration on July 24th minutes before the earnings report is released the at the money options have exploded to twenty six dollars and eighty six cents at which point we could catch the trade in for a one thousand three hundred twenty eight dollar profit incidentally the market loved the Google's earnings report released after the market closed and it actually rallied over a hundred points the next day ironically but we still made money on our bearish play because the market bias was that Google was likely to have a negative reaction to the earnings release and thus sold off prior to earnings based on the fact that it gapped down so far in the previous earnings release so what I'd like you to take away from today's video is that you can gain an edge with options that you can't get with buying or shorting shares of stock and that is the explosive increases in value of options right before an earnings report is released so just as the ACTA money options minutes before and this earnings release were worth eight times as much as the at the money options two weeks earlier if you find through scans that are available tendencies and stocks before earnings based on previous earnings report releases you can add a major edge to your profit potential by expressing your trade using options and enjoying the explosion in implied volatility that invariably takes place before earnings now just to remind you as I said earlier if you enjoyed this video and would like to learn three more real-world option strategies that are traders use including the surprisingly simple strategy that some of the greatest investors in the world like Warren Buffett use all the time plus an options trading strategy that has a statistical 80 percent probability of profit month in and month out plus an option strategy that you can employ with a stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down a small percentage then you should check out the free options class that we're currently running so just go ahead and click the link that should be appearing now at the top right corner of your screen that will open the free registration page in the new window or you can just head over to options class com to register for this free intensive workshop it's a rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it and one more thing I'd like you to do is go ahead please and click our subscribe button so you don't miss any of our trading videos produced for the trading and investing community and while you're at it please add your feedback in the comment section for what videos you'd like us to produce next as well as what you found to be helpful from today's video so from all of us here at SMB trade well

Channel: SMB Capital

Views: 30,366

Rating: 4.9084792 out of 5

Keywords: options strategies for earnings announcements, trading earnings announcements, earnings announcement trading strategy, earnings options strategy, options earnings strategies, options trading, options trading for beginners

Id: 7Wwy58T83W0

Length: 11min 53sec (713 seconds)

Published: Wed Sep 04 2019