An earnings announcement for all publicly traded companies is required to be reported on a quarterly basis (four times per year). In the options trading space we categorize earnings announcements as binary events.
Most other binary events that we encounter are random and unannounced. Conversely, earnings release dates are usually scheduled well in advance. In most cases the scheduled earnings date is as announced and it is stated whether the earnings statement will be released before the market opens (BMO) or after the market closes (AMC). Some companies go as far as to release the schedule dates for their earnings announcements for the entire year.
Why then do I look so forward to them?? Why am I excited about such a mundane event (to the outside world) and proclaim that “Christmas comes four times each year for me”?
If you have followed my blogs, my courses, heard me in a trading room or on a webinar you undoubtedly know that I am primarily a seller of volatility (premium). Furthermore, I specialize in selling volatility (premium) when it becomes extended or “overdone”. I want to sell volatility (premium) when the implied volatility for a particular stock or ETF is above its’ mean percentile.
When volatility is over extended the probability for the reversion of that volatility to return to its’ mean is very, very high. Due to the uncertainty surrounding the release of the quarterly earnings report market makers adjust the implied volatility as earnings approach.
If you closely watch a stock that has earnings on a specific day you will generally see the implied volatility increase throughout the day until market close. This increase represents the uncertainty in the market not only about what the earnings and the future forecast for the company is, but even more importantly how the market will digest the report. The higher the uncertainty the higher implied volatility rises into the announcement.
The market makers are the best odds makers in the world. They are very proficient in establishing a range in which the stock should trade following the earnings release. In the public arena a great deal of time and resources are spent trying to figure out what the move of the stock will be. What a colossal waste of time and money!
In fact I would go as far as to say that if the CEO of the company told you exactly what the earnings will be and what the upcoming twelve month forecast is for the company as a trader you still have no clue what to do with that information. So why wear yourself out trying to be right when the CEO doesn’t even know how the market will interpret the numbers and the future forecast.
If you have been trading any length of time no doubt you have experienced this first hand. A company that you owned had a great earnings report gave great future guidance and the market trashed the stock. Conversely, a company had a horrible quarter of earnings, reported that future expected results would be below original forecasts and the stock bounced up. Point being, “no one knows anything”. So why try to fight it or predict it?
You are probably now asking how we use this information to generate trading profits. I have a complete course that goes into great depth on the criteria and strategies that I use to profit from earnings releases. Let me touch on some of the important reasons to learn to become a trader that relishes “earnings plays” as much as I.
One of the most important reasons to embrace earnings trades is because the results are known in a very short period of time. I like to put the earnings trades on in the last hour of the trading day and expect to exit the trade in the first 30 minutes of the opening the next day. While the vast majority of my trades are typically in force for an average of 20 days, earnings trades are on for less than a full day.
A big advantage for earnings trades for newer traders is that these trades greatly accelerate the learning curve. Another reason is to simply increase the number of trade occurrences. With strategies that rely on probabilities there is a huge advantage in having a statistically significant number or trades each year.
By sticking to the criteria we use to find and execute probability based trades and being sellers of over-extended premium earnings plays will yield our expected results in a matter of hours. We expect to have a winning percentage that is slightly better than our normal trades.
With all the aforementioned advantages of trading the earnings season four times each year, it should be apparent as to why I am so fond of being a highly engaged trader of earnings announcements. Look for future articles about earnings trades in this blog.
If you would like to discuss how earnings trades can be a material part of your trading plan, call me at 513.518.6666, I love talking with other traders……..and I answer my own phone.