Earnings season is upon us. It’s the time of year where companies one and all beautify themselves backstage and prepare for the spotlight. If they impress the judges, they’re showered with affection and fat checks. If they dare to disappoint, Mike Tyson emerges from under the stage and punches them in the face.

It’s a bloody sport, but the residents of the Street do it every three months, rain or shine.

Newcomers to the game sometimes try to guess the outcomes. They tune into the gossip and follow the contestants on Instagram. They even swoon over the judges and track their eating habits to try and discern their mood. In the end, however, they discover their machinations don’t help. Sometimes the fickle evaluators give the crown to a troll. Other times the frumpy girl wins.

Veterans know better. When judgment is meted out at random, forecasting will only lead to frustration. Fortunately, there’s an alternative to picking winners and losers. You can play the beauty pageant a different way.

We call it volatility betting or vega trading.

Enter Magnitude

Since we lack an edge with guessing the direction of the earnings gap, we turn instead to gaming the magnitude of the jump. The question of “which direction?” morphs to one of “how far?”

Volatility trading comes down to two flavors:

Bet stock will move more than expected = bi-directional strategy

Bet stock will move less than expected = neutral strategy

Pick your poison!

Fortunately, it’s easy to identify what the market is expecting. For obvious reasons, we call this the expected move. ThinkorSwim refers to it as the Market Maker Move or MMM. Here’s a picture of where you can find it in their platform:

We’re looking at Amazon which reports earnings after the bell. The expected gap is $62.57, which translates into a jump of 3.1% (62.57/2000). Does that strike you as high or low?

At first blush, it seems low. For reference, the Average True Range (ATR) is about $30. So traders think AMZN will move 2x its usual daily move after earnings.

The MMM is directly linked to implied volatility. The higher the implied vol, the more the stock is expected to move. The lower the implied vol, the less the stock is expected to move. Let’s look at the reading for Amazon:

This is the lowest we’ve seen implied volatility ahead of an earnings report in ages. The market is expecting tonight to be a real dud, a non-event.

Do you?

If so, then short volatility trades are in order.

If not, then it’s time for bi-directional trades. You’re betting the crowd is too complacent and that AMZN may well move more than expected.

Fly Debicon, Fly

My favorite bi-directional strategy for expensive stocks like Amazon is the debit condor or debicon for short. Think of it as an inverted condor where instead of betting on neutrality you’re banking on a big move one way or the other.

When implied vol is low, this trade is cheaper than usual and carries less risk.

There are a million permutations of the trade but here’s one example. With AMZN perched at $2000, suppose we entered the Aug 1935/1955/2060/2080 Debicon for $12.95. The trade consists of buying the Aug 1955/1935 bear put and the 2060/2080 bull call spread.

The initial cost of $12.95 represents the max loss and will be forfeited if AMZN sits between $1955 and $2060 at expiration. The max gain is the spread width ($20) minus the cost (12.95) or $7.05. To capture the entire profit, we need AMZN to fall below $1955 or rise above $2080 by expiration.

Going for max profit or max loss is a fool’s errand, though. I suggest settling for partial gain or loss depending on how the earnings report shakes out.

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