Options trading around earnings can be very predictable and profitable. Successful options traders are those who learn to manage and take advantage of key aspects of options trading including the effects of time decay, volatility ‘rush’ or ‘crush’, and stock movements around news ‘events’.
Experienced stock options traders often use stock options strategies based on the behavior of the stock and its options surrounding events. The most common such event is an earnings announcement, which occurs every quarter; some stocks move significantly in the days before or right after their earnings announcements, and some have a volatility ‘rush’ prior to and a volatility ‘crush’ right after the earnings announcement. By knowing when the next earnings announcement is, one can plan to enter a trade with a higher likelihood of success. Other events might include investigations into fraud or ‘banking irregularities’, FDA approval or denial of a drug, or even national or global catastrophes.
OPTIONS TRADING AROUND EARNINGS
Review the behavior of the stock and related options for the previous 8 earnings announcements, and answer the following questions.
- Does the stock move up or down dramatically (especially gaps) either before or after the earnings announcement?
- Does implied volatility rise dramatically in the days before the earnings announcement?
- Does implied volatility drop dramatically in the days following the earnings announcement?
OPTIONS TRADING AROUND EARNINGS – STRADDLE/STRANGLE PLAY:
IF a stock is known to move dramatically before the earnings announcement and the implied volatility is known to rise in the days before the announcement, buying a straddle or strangle before the expected changes in stock movement and implied volatility will increase the probability that the trade will be profitable irrespective of which way the stock moves.
Cautionary note: One has to remember that theta decay will be eat into the trade and implied volatility will drop (‘crush’) after the announcement, hence, the trade should be exited promptly if it is not profitable just prior to the earnings announcement.
OPTIONS TRADING AROUND EARNINGS – PRICE MOVERS
The following is a list of stocks with an average percentage price move of greater than 15% in the 20 days prior to their earnings announcement in the last 18 months (as on 7/04/13).*
| Stocks | Name |
| KBH | Kb Home |
| DDD | 3d Systems Corporation |
| MTG | Mgic Investment Corporation |
| FSLR | First Solar Inc |
| LCC | Us Airways Group Inc |
| NFLX | Netflix Inc. |
| TSLA | Tesla Motors, Inc. |
| LEN | Lennar Corporation |
| STX | Seagate Technology |
| KORS | Michael Kors Holdings Ltd |
| IOC | Interoil Corp |
| GMCR | Green Mtn Coffee Roaster |
| MU | Micron Technology Inc. |
| GNW | Genworth Financial Inc |
OPTIONS TRADING AROUND EARNINGS – VOLATILITY RUSH
The following is a list of stocks with an average percentage increase in ATM IV of greater than 15% in the 20 days prior to their earnings announcement in the last 18 months (as on 7/04/13).*
| Stocks | Name |
| LNKD | Linkedin Corporation |
| GMCR | Green Mtn Coffee Roaster |
| AMZN | Amazon.com Inc |
| NFLX | Netflix Inc. |
| P | Pandora Media Inc |
| CTL | Centurytel Inc |
| ESRX | Express Scripts Inc-cl A |
| DIS | Walt Disney Co The |
| FB | Facebook Inc |
| SBUX | Starbucks Corporation |
| AMGN | Amgen Inc. |
| YUM | Yum! Brands Inc |
| NKE | Nike Inc. (class B) |
| AAPL | Apple Inc |
| AFL | Aflac Incorporated |
| QCOM | Qualcomm Inc. |
| V | Visa Inc A |
| HPQ | Hewlett-packard Company |
| LVS | Las Vegas Sands Corp |
| BRCM | Broadcom Inc. |
| FSLR | First Solar Inc |
| EXC | Exelon Corp |
| CRM | Salesforce.com Inc |
| CREE | Cree Incorporated |
| AIG | American International Group I |
| GILD | Gilead Sciences Inc. |
| VMW | Vmware Inc |
| TSO | Tesoro Corporation |
| SNDK | Sandisk Corporation |
| DVN | Devon Energy Corporation |
OPTIONS TRADING AROUND EARNINGS: CREDIT SPREAD PLAYS
IF a stock experiences a significant increase in implied volatility immediately before the earnings announcement, it will likely experience a dramatic drop in implied volatility following the earnings announcement (‘IV crush’) – this is because the uncertainty about the earnings no longer exists. The movement of the stock may also affect the change in IV – a gap up often will result in a marked drop in IV, while a gap down may diminish or abrogate the IV crush. A high-probability options strategy that can result in a ‘quick’ profit is to enter a far OTM credit spread on the day of the earnings announcement (for announcements made after market close) and on the day prior to the earnings announcement (for announcements made before market open). A GTC order placed immediately following entering the trade can result in an automatic exit if the stock gaps in a favorably direction following the market open – see How to Trade Stock Options Online for more details on this topic.
OPTIONS TRADING AROUND EARNINGS – VOLATILITY CRUSH
The following is a list of stocks with an average percentage drop in implied volatility of greater than 15% following their earnings announcement in the last 18 months (as on 7/04/13).*
| Stocks | Name |
| AMZN | Amazon.com Inc |
| WFM | Whole Foods Market Inc. |
| P | Pandora Media Inc |
| LNKD | Linkedin Corporation |
| GMCR | Green Mtn Coffee Roaster |
| NFLX | Netflix Inc. |
| DIS | Walt Disney Co The |
| FB | Facebook Inc |
| SBUX | Starbucks Corporation |
| NKE | Nike Inc. (class B) |
| AAPL | Apple Inc |
| CRM | Salesforce.com Inc |
| YUM | Yum! Brands Inc |
| QCOM | Qualcomm Inc. |
| CSCO | Cisco Systems Inc. |
| CREE | Cree Incorporated |
| BRCM | Broadcom Inc. |
| LVS | Las Vegas Sands Corp |
| FSLR | First Solar Inc |
| IBM | International Business Machin |
| STX | Seagate Technology |
| SNDK | Sandisk Corporation |
| VMW | Vmware Inc |
| V | Visa Inc A |
| AFL | Aflac Incorporated |
| AIG | American International Group I |
| INTC | Intel Corporation |
| MSFT | Microsoft Corporation |
| WYNN | Wynn Resorts, Limited |
| GILD | Gilead Sciences Inc. |
| A | Agilent Technologies,corp. |
As always, successful traders are those who take the time to learn how to invest and trade, create a plan for their trades before they enter a trade, learn from their trading experiences about what works and what doesn’t work, and study how to improve their trading in the future. While options trading can be wildly successful, success does not come to those who are unwilling to ‘pay their dues’ by learning the finer nuances of trading.
Happy Trading!
JonLuc
* While the above information is believed to be true at the time of writing, readers are advised to base their trade decisions on their own independent analyses.
