February 18, by Mike Butler. When a publicly traded company announces earnings, they are reporting the profit that a company made for a set time period. Companies have earnings announcements to show how their company is doing from a profitability standpoint.
Many companies also release plans for the future. At dough, we consider earnings announcements to be binary events. To put it simply, binary events in the financial world are events that either have a positive or negative outcome.
Earnings events are what we call tradable binary events. This means that the underlying will experience some of its most extreme levels of volatility.
At earnings, IV rank is typically at it highest levels but not always. You can see this represented by the volatility graph to the right. This is quite common to see around earnings.
So how can you exploit the expected volatility crush that comes after a binary event? One option our personal favorite is to sell premium around earnings. What's the first step to doing this? Picking an expiration date!
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Think of implied volatility in relation to earnings as an upward climb. Implied volatility grows and grows as earnings near, and after earnings are announced, that upward climb turns into a downward spiral.
Now, that we have picked a date, the next step is to pick a direction bearish bullish, or neutral. Then, we need to figure out at what strike price we want to place our trade which helps determine our break even point.
This can be a tricky decision, but you do have a lifeline! If you want to make an earnings play another name for placing a trade specifically to capture the volatility crush that occurs during earnings , choosing the right strike price s can be a difficult task.
If you go to the trade page on dough, you will see a settings button towards the lower left hand corner. If you click on that button, you will see a variety of different settings. Click the one that says 'Show range of expected move during earnings'. Clicking this will bring up a pale red bar below the stock price indicator.
How To Use Options To Trade Earnings Season
The expected move setting the pale red bar is used for earnings to signify a range that the stock price is likely to end up between, after earnings. By incorporating this number on the strike price bar in dough, you can easily maneuver your strike prices and clearly see if your break evens cover the expected move or not.
For this reason, our main earnings strategy is selling premium. This means that any strategy that allows us to place a trade for a credit will do. There are many other strategies to use for earnings plays, but for newer traders, these are great strategies to try around earnings!
Options Strategies for Earnings Season
Learn more trading strategies through Step Up to Options. Covered calls are a great way to enhance long stock positions by lowering your cost basis and improving your probability of profit.
In part 3 of our series on vertical option spreads, we go over long vertical spreads, also known as debit spreads. Who are you calling short?
In part 2 of vertical option spreads, we go over short vertical spreads, also known as credit spreads. Beginner intermediate Blog Sign Up Login. Why Do Companies Have Earnings? The first place you will see earnings in dough is on the trade page. If you have an underlying pulled up and you click on the E in the upper right corner, you will see a purple flag if earnings or dividends are coming up in the next four expiration cycles.
This is useful for placing earnings trades, but more importantly if you are not placing earnings trades and you want to choose an expiration that avoids the earnings announcement. The best place to find detailed information on earnings is on the grid page. Clicking on the E on the right panel will display earnings information for the day selected. Clicking on the binoculars will pop out the full earnings page, which gives you the ability to sort and search as well.
Binary Event — Earnings At dough, we consider earnings announcements to be binary events.
Choosing An Expiration Think of implied volatility in relation to earnings as an upward climb. We want our trade to capture the peak of the climb, not the bottom of our spiral.
Expected Move If you want to make an earnings play another name for placing a trade specifically to capture the volatility crush that occurs during earnings , choosing the right strike price s can be a difficult task.
Luckily for you, dough has a tool that can help you decide your strikes! How to Find Expected Move on dough If you go to the trade page on dough, you will see a settings button towards the lower left hand corner.
That is where the magic happens! The above gif shows you how to pull up the expected move on dough's trade page. Below are a few suggestions for strategies to try based on your market assumption Bearish Strategies Short Call Spread Naked Call Bullish Strategies Short Put Spread Naked Put NEUTRAL Strategies Iron Condor Strangle There are many other strategies to use for earnings plays, but for newer traders, these are great strategies to try around earnings!
Learn more trading strategies through Step Up to Options Earnings Recap. Sign up for dough to place your first earnings trade! Aug 18, beginner Trading strategy , extrinsic value , probability of profit , implied volatility m slabinski Comment. Covered Calls - What is a Covered Call? Jul 14, beginner Trading strategy , defined risk , bearish , vertical , spread m slabinski Comment. Vertical Options Part 3: Trading a Long Vertical Spread. Jul 7, beginner Trading strategy , defined risk , vertical , spread m slabinski Comment.
Vertical Options Part 2: Trading a Short Vertical Spread.