Hey Tackle Traders,
Have you ever been at a gathering of any kind where there’s music being played and come across that one guy or gal that lives on the dance floor getting their boogie on all night long? Not only is this guy or gal dancing the night away, but they are also the kind to spot you tapping your feet while seated and once you lock eyes it’s a done deal that they are coming to grab you from your seat to join them on the dance floor. A few jams later the DJ changes the set and you signal to your dance partner that you are going to sit it out and gracefully bow out. I have been on both ends of the stick at such gatherings and if you were to poll my friends and ask them which side I’m I more likely to be on, they’d say I’m more likely to be found on the dance floor than sitting so dancing is not your forte run and hide from people like me, LOL!
Earnings season is a tricky season for new traders. The urge to want to get on the dance floor and participate in those highly anticipated price movements is real and many think this is their opportunity to hit it big until they meet a faster dancer on the floor named Vega. Options traders who primarily use delta and theta Greeks are used to a certain speed and can be caught completely off guard when it comes to vega. Unlike trend trading where you make your decision to enter a position based on pattern recognition and determining a bias on direction, with earnings you have to factor in volatility because it affects the premium on options. The closer a stock gets to earnings, the volatility increases and then drops post-earnings. This volatility crush can either make you or break you. It’s important to have a plan of how you intend to approach earnings if you dare to step onto the dance floor. Study the companies you plan to trade. Do they tend to gap up or down enormously when earnings are announced or do they remain in a neutral range for the most part? This will help you determine whether you’ll be a net buyer or net seller and use the appropriate strategy like strangles, straddles, inverted flies, or condors. If you decide to sit it out and let a company report on earnings before getting back into a position that’s fine too. Here are some tips I’ve learned that might be of some assistance.
Sitting it out can be as simple as closing your position on a stock before it announces earnings. No one would criticize you for locking in profits before earnings, especially for swing and position trades. It could also be a losing trade that hasn’t yet hit your stop and you decide to manually close the trade to avoid further loss post-earnings. Another alternative would be to trade ETFs because they don’t have earnings to report. What about those long-term positions in IRAs for example that you cash flow on and you don’t necessarily want to sell those shares each time they are reporting earnings? Consider buying a protective put to protect you from a downward movement in price yet leaving you with unlimited profit potential to the upside. Take AT&T, for example. An investor that owns shares of T may have considered buying a Put option before yesterday’s earnings report to protect themselves if the stock price dropped. Based on when said put option was purchased and days left to expiration, the put option would still have had some value left and upon market reaction to earnings and guidance, the investor would then decide to exit their put option position and revert to cash flow. Another investor might look at T and decide not to buy a put option because historically T does not have a gapping disorder on earnings.
If you choose to dance, go back and check the previous earnings performance of the stocks you plan to trade. What kind of price movement does the company tend to have on earnings? Does it gap in either direction or does it stay within a price range? What’s your technical bias to determine the strategy. For example, if you have a strong bias that a stock will gap either up or down and you don’t have a directional bias, consider a bi-directional trade like an inverted fly. An inverted butterfly works with stocks that have big moves like in this example of ROKU.
Perhaps you have no directional bias. A short strangle allows a trader to take advantage of selling a low delta call and a put right before earnings when volatility is increased. Short strangles do require a higher margin so lower-priced stocks are your best option or modify the short strangle into an iron condor for the higher-priced stocks. For more on rules and application of these and other volatility trades, check out the Tackle Trading Playbook. https://tackletrading.com/store/tackle-trading-playbook/
Ladies also join me tonight at 8:30pm est where we’ll continue this conversation of dancing and earnings.
Until next time Traders!
Emily Muiruri was born and raised in Nairobi, Kenya before her family moved to the US and settled in Maryland, Emily began her trading journey in January 2015 after 17 years of Property Management in the Self-Storage Industry. Like many new traders, Emily started off with directional trading strategies such as long calls, long puts and very little in cash flow strategies. Over time that has changed and now her core trading strategies are cash flow based such as are Covered Calls, Naked Puts, and Iron Condors. Though she is still a student learning and enhancing her trading skills, she has a strong desire to teach women to take control of their finances and become traders. Writing blogs is one of the ways she’s is looking to spread the word and get more women involved. Emily knows that with the right education and trading system women can be successful traders.
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