Traders,

We’re in the thick of earnings season, and price gaps litter the landscape. Some companies deliver the goods, and their share prices jump overnight. Others dare to disappoint and get punished accordingly. When it comes to betting on the earnings announcement, many veterans avoid direction and bet instead on volatility.

It’s all about the magnitude of the move, and it’s pretty simple.

Heading into earnings, the options market prices in a certain amount of movement, commonly called the Market Maker Move (MMM).

• Long Volatility trades like debit condors and inverted flies bet that the stock will move more than expected.
• Short volatility trades like iron condors and short strangles bet the stock will move less than expected.

Take Tesla, for instance. The EV giant reported earnings last night. Heading into the number, the MMM was $39.26. As I write this on Wednesday evening, Tesla shares are only up $10 after hours. Assuming prices open at the same level on Thursday, short volatility positions will come out as the big winners.

Traders harnessing long vol positions will awake to disappointment and losses. Tesla didn’t move enough.

Video Of The Day: Jedi Options – Rolling Up Covered Calls

In today’s Jedi Options, Coach Tyler explains what rolling up covered call is.

Chart of the Day: Tesla’s Expected Move ($TSLA)

The Thinkorswim options chain shows the Market Maker Move at the top. Tesla’s options were baking in an overnight rise/fall of $39.

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