Trading Earnings - Do We Need to Trade Them? | Everyday Trader

[Music] hey everyone welcome back to the show thanks for tuning in my name is Mike this is Ryan this is every day trader Ryan how's it going today can't complain Mike how you doing pretty good pretty good thanks for having me on the show yeah you got it it's been an interesting few days in the market yeah this has been tough a few short you know the markets continuing to move higher here for variety of different reasons we'll see if that continues we know that you know after so many days up we typically do get a down day nothing goes up forever so there will probably be some relief at some point for anybody that's that short the market but it's been tough you know you look at some of these things you look at the financial sector you look at the broad-based indices whatever it might be and they look like they're pretty good opportunities because you got fairly high prices you know they kind of go down we just haven't seen that yet we haven't seen a 1% pullback in in quite some time and really since the US election here so we'll see what the future holds but there will be times for for short premium trades there will be times for for shorts here I'm just gonna be patient yeah definitely patience is a virtue for sure so today I wanted to kind of talk about earnings or lack thereof and not trading earnings so the past few days we've been talking about things we look for in earnings trades yesterday Nick and I talked about some of our favorite strategies to trade when we're talking about earnings but I know that you are not too big of a fan of actually trading earnings so I wanted to kind of get into that yeah I just don't train them that often I don't have anything against our new trades I think they definitely present some interesting opportunities when the conditions are ripe but I also think you know you need to if we're talking about your the every day trader you're new to trading whatever it might be need to understand too that it's not something that you have to force you know in the same way that you're constantly looking for opportunities but if you see that in this particular quarter the volatility is not all that high you don't have to force the short premium trade around earnings because there is an element of risk that I think a lot of new traders don't necessarily understand so there's ways that you can structure positions around that to have a certain degree of risk of version but at the end of the day you don't always have to come in here and just because a stock has an earnings announcement or there's five earnings today doesn't mean you have to do them all or that kind of thing you got to kind of pick and choose but that's my approach everybody has their own philosophy towards it but I look for you know different opportunities when they're there I seize them and if they're not I don't trade them so to sum it all up I probably don't trade earnings as frequently as everyone else but I do when when I believe there's an opportunity yeah and I like the way you brought up just forcing trades because I think when it comes to the way that we trade and the trade small trade often approach I think that by tranqs trading small and managing our winners it enables the ability to trade often but for me I think that training small is the most important thing because a lot of times if if I'm only in a ten thousand dollar account or twenty five thousand dollar count I can't be slinging trades every single day I can't be forcing trades because right my account won't be able to withstand it so just taking these things into account I just think it's interesting to get back to the principles of why we might do something why me might avoid it and then offer some alternative so why don't we go on to the first side and we'll talk about why we might trade earnings in the first place so in an environment like this where volatilities sitting right around 12 implied volatilities sitting at twelve sixty seven right now it's a pretty low implied volatility environment it's really difficult to find trades where we can take advantage of heightened implied volatility if we want it to sell premium so we might look to something like an earnings announcement which basically synthetically creates that environment for us so if we think about why we love trading implied volatility or heightened implied volatility in the first place it's because number one we're going to be offered higher premiums than a regular environment which is ultimately going to help our breakeven points we can also get further out from the strip from the current stock price and get those same levels of premium that we might in a lower implied volatility environment so we're basically enabling that beneficial scenario for us when we look at that earnings announcement environment yeah I think especially in an environment similar to the one that we have currently where if you're specifically looking for short premium opportunities opportunities to sell high implied volatility or rich option prices however you want to slice it there's not a lot you know at least given the liquid underlyings that we look at there just hasn't been a lot of compelling opportunities so therefore you tend to gravitate towards some of these earnings announcements maybe more often than you would or it's a sweet spot in selling volatility and we can talk about why that is here and what you know why that volatility is overstated yeah absolutely so when we're looking at just general overstatement of implied volatility when we're looking at regular trades and even earnings trades we've shown through our research that generally implied volatility is going to be overstated so whether we're looking at a regular cycle with no earnings announcements where we're just trying to sell a 45 day total expiration option generally not always but generally we'll see an overstatement an implied volatility which is going to benefit the premium seller right given the amount of time that's left in the expiration when you look at where option prices or where options are bid relative to the current price of the stock you see that those out of them when he calls and those out of the money puts are a lot richer than they would be if there wasn't a binary event aka at earnings announcement exactly so with all this said there are some things that might deter us from an earnings announcement so why don't we go to the next slide and we'll talk a little bit about that so when I'm thinking about reasons why I might avoid an earnings announcement there's a few things that come to mind so the very first thing is like like you said there is a level of risk to earnings announcements there's implied volatility is heightened for a reason so we might see earnings announcements where nothing happens we might see earnings announcements that increase the stock price 20% decrease the stock price 20% we might see an earnings announcement where they show positive results but the stock price drops so there's a heightened level of an uncertainty which is why those premium levels are a lot higher so the very first thing that I think about when I might for a reason why I might avoid earnings is because of those big moves that can't right and the interesting thing about this - and why earnings are sometimes difficult is because there's so much different than our traditional short premium strategies where we talk about the importance of time and this variable plays a very large role in our typical trading strategy our traditional strategy or approach where I want to go 45 days away I want to take advantage of theta K etc etc here you're eliminating that variable there is no time you're not giving yourself you know any buffer in that sense and you're not taking advantage of a more consistent rate of decay that occurs on you know a weekly basis maybe over the course of one and a half months instead you're basically saying okay the market predicts X move and I think that it's going to be inside of it or vice versa the market is saying that it's going to move this much and I think it's going to be well outside of it and that's why this is such a different trade than our typical Shore premium strategy yeah definitely and I like the way you brought that up in terms of the time factor so when we look at earnings plays they are binary in a sense because something happens or maybe something won't happen from that specific announcement so when we look at the timing factor of it we can compare two scenarios so why don't we take one example where we're looking at a stock price that let's say it increases 10 percent over the course of 30 days and let's say I sold a call and I thought it wasn't going to go the opposite way I would have 30 days to make certain adjustments and I would have a lot of different opportunities to reassess my assumption maybe get out if I wasn't liking the trade at that point anymore but with an earnings trade let's say the stock price jumps 10 percent overnight which is something that can definitely happen so in that scenario if I had sold a call I could be basically looking at the stock price after hours when the announcements made I can't really make any adjustments with my option because the option markets closed so it's basically very similar to watching a movie and fast forward exactly yeah you have and I think that variable then is the gamma risk right we talked about that here on the show maybe it was last week or a couple weeks ago where you have that 30-day option your short to call even if it's moving against you don't have as much gamma risk whereas with one day to go you might have still gotten a decent premium because implied volatilities high for selling that call option but you've got a lot more gamma risk yeah definitely because even if you can get that higher premium it's still likely going to be wrapped around much closer to the stock price than if we were looking at the same sort of implied volatility level with all that time on their side as well and another thing that I look at and think about when I might want to avoid an earnings announcement is the IV differential so if we're looking at one of the opportunities of an earnings announcement it is going to be that IV differential and the difference between the implied volatility of that cycle that actually has the earnings announcement in it and comparing that to maybe one week out or the next month so the difference there the larger the difference there is usually going to indicate a heightened implied volatility and premium levels because of that yeah and I think that would to me present more of an opportunity if I have a much larger implied volatility differential between that front month expiration in the next month out or the next weekly or whatever it is you know the wider that spread is I think the the more compelling it is for me to sell premium relative to win that spreads pretty tight yeah and I totally agree with that and when you think about it if you're going to be taking on some risk going into this announcement if that differential is not very high it's pretty indicative of the fact that the premium levels are not going to be very different so in a lot of ways I'm putting on the risk and I'm basically exposing myself to a potential terrible situation if the announcement goes awry and it goes against me so what are some alternatives that we can think about if we're trying to maybe avoid an earning season maybe there's just not a lot of opportunities there so why don't we go to the next side and we'll talk about a few things that I think of when we look at alternative so like we've been talking about with earnings and just our general trading style if we get back to the basics and understand implied volatility and some of the things that we believe to be true with implied volatility we can really put ourselves in a in a better position from an overall portfolio perspective if we're trying to avoid earnings announcements and just work on the portfolio so if we're in a low implied Atilla tea environment like this of course there's not going to be a lot of opportunities out there which is why we might go towards that earnings announcement to get that synthetic implied volatility or heightened implied volatility but when we actually look at why we trade options and why we sell options and higher implied volatility levels one of the reasons is because we believe implied volatility to be mean reverting so when we say we believe that to be mean reverting we're basically saying if implied volatility is high we believe that eventually it will come back down to a lower level than when it where it was when I sold that option so if implied volatility is low we could have that same assumption and we could build strategies around that or just make sure that we're not too exposed in the short Ivy sense yeah you know to me I think it's kind of having a balance of both strategies where you have some long vowel trade some long Vega trades long premium whatever you want to call it and then also your short volatility trades because there's nothing wrong with selling premium or selling options in an environment where you know volatility is relatively low in the sense of implied volatility is low relative to you know realize fall being low because if you don't get the actual volatility then your underlying moves sideways those neutral strategies or short premium trades they worked out it's understanding though that there's a heightened degree of risk in doing so because of the mean reversion that you've just mentioned so in that case I want to have a balance I can still sell premium Ivy ranks not all that high it's not 50 it's 30 it's 20 whatever it might be still sell premium you don't get paid as much but a lot of times the mark is pretty efficient in pricing the outcome and therefore the underlying doesn't move either we sometimes see that but in the cases that the underlying moves significantly against you you got to have other trades on that offset it and that's where your long Vega trades come in exactly like you have up here on the slides balance out the short risk it could be as simple as saying you know what equities are going up spies moving higher I'm gonna sell some puts but at the same time I'm gonna have a handful along VIX calls just in case if we do see those puts lose value or our positions those value I should say as the market moves slower the VIX calls make us some money balances it all out yeah and it's a good way to basically ensure your scenario so it's not putting all the risk on one side it's basically hedging your overall profit potential by looking at scenarios and strategies that can actually benefit you and maybe offset all if not more than the losses that you would see in a scenario where the market rips to the downside for sure yeah it depends on you know what your real assumption actually is and how you structure those positions but a lot of times for sure you know if you're using the short premium to finance a good chunk of the long premium the long premium better make you some money when it moves and you know offset any of the losses at the short preview yeah absolutely so let's get to some takeaways and then we'll throw on a potential trade of the day so when we're looking at earnings announcements I view them as non-essential engagement tools a great way to put yeah it's it's not something that we need to get into it's not something that we need to force occurrences but if the opportunity is there maybe there's a situation where I personally like chicken iron condors maybe I can cover the expected move and collect 50 percent of the width where I'm risking one to make one and if I believe that the moves gonna stay within that range then it might be a good trade for me but at the same time I'm not going to risk 20% of my account on an earnings trade just because I'm bored and I want to you know see what I can do to make some money right and also selling premium in low IV can still work we've actually shown research studies that if we just continue to sell premium in all environments we can be more stable in our P&L because implied volatility really is just an implication of movement so if implied volatility is low and I'm able to sell premium and IV overstates realize volatility then it's going to be a very similar scenario then it's going to be a very similar scenario to selling premium at high volatility and seeing that same realization yeah you could sell premium anytime as long as what you're selling is actually premium if the implied volatility is high relative to future realized volatility then you always sold premium exactly and basically if we want to find a way to offset the short premium and short Vega risk that we have with selling premium we can always look at some long Vega trade so long Vega trades are going to offset those short premium trades that we have in implied volatility does rise and if we believe that implied volatility is mean reverting it's definitely going to be something that I'm going to be looking at to hedge my overall portfolio yeah it can't hammer home you know enough that first point there where it's not essential because so many times people get into options trading they understand the probabilities involve the understanding apply volatility and so on and then you start to hear about earnings and you think well I must be missing something am I missing something else you know is this something I should be doing or I shouldn't be doing we can definitely do when we do them all the time it's just not something that you have to do you know if we're saying okay here are the rules in a sense want to look for high implied volatility I want to take advantage of those situations and so on all of that applies but it doesn't mean that you also have to do earnings it's up to you yeah absolutely so let's get to a trade that I was looking at earlier and it's definitely going to be something that's gonna offset the short Vega that I have right now so the Diamonds we've seen are just skyrocketing higher so I'm just going to take a contrarian stance on there and ultimately offset a lot of the short Vega risk I have a lot of my portfolios made up of short premium trades right now and with volatility at these levels I think it would be a good idea for me to look into something like this so I'm basically looking at buying the 210 put in April and selling the 208 put in March so it's an eight point wide poor-man's covered put and the trade price is right around $5 so it's for 94 max losses for 94 and if I'm paying $5 for an $8 wide spread my assumption is that by March expiration if it's completely in the money it could be trading around $8 so I'm gonna look at looking at I've been basically looking at taking about half that so my personal profit target is gonna be a dollar fifty and if I look at all the other positions in my portfolio if I'm able to actually make this happen it's going to offset a lot of the losses I might see on a lot of my bullish market trades yeah I think this is a smart setup the conditions are ripe for it in the sense that it's really tough to step in front of a freight train right which is what we have at the moment but you can do that or you can argue that the probability of it you know moving low or making more money on the downside is higher than it going up another 20% to the upside so having that standing and that being your assumption you then have to figure out well how do i structure this in a way where I don't get burned probably not gonna come in and just step in front of it and try to sell calls because we just don't really know how high this could go this is a great trade it's a diagonal it's great trade for this particular situation because yeah you're willing to risk about five hundred dollars to make 150 or potentially even 300 and have over you know a 50% return on your risk in that sense if you get to 300 and if you're wrong well you were wrong but you didn't get blown out right now and this is an environment where there's always the possibility that happening we saw this in 2013 and 2014 so whether that's the same situation or not you have to be cognizant of it you have to have that level of market where 'no sand you have to your structure your trades accordingly yeah absolutely so we'll see what happens if I can fill on this trade I'll definitely post it on the follow page as well as my twitter account which is at tasty trader Mike if you want to follow Ryan he's that tasty trade Ryan thanks again Ryan for coming on thank you Mike stay tuned though we've got Jim and Brittany coming up next for where do I start 101 what if everybody I hope you like this video click below to watch more videos subscribe to our Channel and don't forget to check out tastytrade.com [Music] [Applause] [Music]

Channel: tastytrade

Views: 2,429

Rating: 4.875 out of 5

Keywords: trading, trader, stock, market, finance, learn to trade, beginner trader, options, options trading, tastytrade, profit, trading tutorial, investing, how to trade, Trading Opportunity

Id: jIkaw1IylD4

Length: 18min 55sec (1135 seconds)

Published: Wed Mar 22 2017