Get Ready for Flood of Earnings

Published on October 16, 2007

Get Ready for Flood of Earnings

October 16, 2007

(for details pls visit www.OptionPundit.net)

A lot of companies are about to announce earnings this week. As I mention after every 3rd month, this is one of the rarest weeks that comes only once in 3 months. To recap, this is October equity expiration week and there is very little time value left in options making options cheap. Most of the intrinsic value is driven by implied volatility though.

One of the best ways to leverage is to play earnings announcement (a.k.a. large movement) in the cheapest possible way. I have covered on how to play earnings extensively in the past (GOOG1, GOOG2). You may wanna browse this site a little more to see examples of real trades.

Companies that are going to announce earnings after market includes CCK, CHB, CSX, IBM, INTC, LLTC, SPSN, STLD, STX, USNA, YHOO. Before market opens, ABT, BLK, CMA, KO, JPM, and many more will announce their results which will offer great opportunity to make money. Here is my simple 7-step toolkit for playing earnings:

  1. Select underlying you want to play earnings speculative strategy. It should offer Great risk/reward ratio.
  2. Review past history and understand how much it can either gap-up or gap-down.
  3. Assess level of implied volatility and by what % it will collapse after earning announcement. Contrary to popular belief that IV rises with fall in prices, IV will, in most cases drop after the announcement regardless of underlying’s direction.
  4. Determine your bias for play, either direction (up or down) or non-direction.
  5. Choose appropriate strategy for your bias [spread(s) or Straight call/Puts]
  6. Allocate funds you would like to invest. As a general guideline, I keep it to only 2-5% of overall portfolio capital per trade.
  7. Determine your entry as well as exit. IV will rise even further (even if I assume price to remain same during the whole session) so even if you decide not to keep it overnight, options should become pricey towards the session end. If it meets your exit criteria, it’s better to book profit instead of taking risk for a speculation.

Above steps doesn’t consider any technical or fundamental analysis. That’s to determine direction and I generally prefer “non-directional” speculative strategies. This is more of a “abridged” version of detailed analysis. Any speculative strategy is risky. So before diving it is always good idea to paper test your strategy.

Profitable trading, OP

2 Comments

  • Avatar Tony Chai says:

    Hi :

    Great advice to investors who are into earnings play, which are always speculative and one shouldn’t allocate too much capital into so-called sure-win trade although fundamentals or technical analysis might point towards a particular stock direction after earnings.

    Congrats to your over 50% profit achievement this October. You are in the league of Jim Cramer now 🙂

    More profitable trades to you.

    Regards,

    Tony Chai

  • Avatar OptionPundit says:

    Thanks for kind words Tony.

    Though I am very pleased with 50% returns, I am not looking for so high returns. These are exceptional and I don’t think these are repeatable. I am targeting for only +6.9% per month so that I can double my capital every year 🙂

    Thanks and have fun in profitable trading, OP

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