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The 5 Best Options Strategies for Trading Earnings

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We all know that earnings season can be a volatile time for stocks.

But did you know that there are options strategies you can use to trade earnings announcements?

In this post, we’ll discuss the five best options strategies for trading earnings announcements.

We’ll also provide some tips on how to pick the right strategy for your trading goals and risk tolerance.So whether you’re looking to make a quick profit or hedge your portfolio against downside risk, read on for the best options strategies to trade during earnings season!

Table of Contents:

The 5 Best Options Strategies for Trading Earnings

If you’re like most investors, you probably get a little anxious when earnings season rolls around. After all, anything can happen when a company reports its quarterly results.

The stock could gap up or down, and you could find yourself on the wrong side of a trade. But there are ways to trade earnings that can take the guesswork out of the equation and even give you a chance to profit no matter which way the stock moves.

Here are five of the best options strategies for trading earnings.

1. Straddle.

Straddle
Straddle Spread P&L Diagram

A straddle is an options strategy that involves buying both a call and a put on the same stock with the same strike price and expiration date. The idea behind a straddle is to profit from a big move in either direction.

If the stock moves a lot, you’ll make money. If it doesn’t move at all, you’ll lose money.

And if it moves just a little bit, you’ll also lose money. So, you really need to have a good handle on where the stock is likely to move in order to trade a straddle successfully.

Here’s more on how to trade straddles into earnings:

2. Strangle.

strangle spread
Strangle P&L Diagram

A strangle is very similar to a straddle, except that the strike prices of the call and put are not the same.

Instead, the call is usually purchased with a strike price that is lower than the current stock price, and the put is usually purchased with a strike price that is higher than the current stock price.

The idea behind a strangle is to profit from a big move in either direction, just like with a straddle. But because the strike prices are further away from the current stock price, strangles are usually less expensive to trade than straddles.

3. Put Ratio Backspread.

Call backspread

A put ratio backspread is a bearish options strategy that involves buying puts and selling more puts at a lower strike price. The idea behind this strategy is to profit from a big move down in the stock price.

The put ratio backspread can be profitable even if the stock doesn’t move as much as you expect. That’s because you’re selling puts at a lower strike price, which means you’ll keep the premium even if the stock doesn’t move as much as you hoped.

4. Call Ratio Backspread.

A call ratio backspread is the mirror image of a put ratio backspread. It’s a bullish strategy that involves buying calls and selling more calls at a higher strike price.

The idea behind this strategy is to profit from a big move up in the stock price. Like the put ratio backspread, the call ratio backspread can be profitable even if the stock doesn’t move as much as you expect.

That’s because you’re selling calls at a higher strike price, which means you’ll keep the premium even if the stock doesn’t move as much as you hoped.

5. Iron Condor.

iron condor options strategy
Iron Condor Profit & Loss

An iron condor is an options strategy that involves buying and selling both calls and puts. The idea behind this strategy is to profit from a stock that doesn’t move much at all.

Iron condors are usually traded with the expectation that the stock will stay within a certain range. If the stock does move outside of that range, then the trade will start to lose money.

Of course, there are no guarantees when it comes to trading earnings. But these five options strategies can help you navigate the waters and even profit no matter which way the stock moves.

 
Key Takeaway: 5 options strategies for trading earnings: straddle, strangle, put ratio backspread, call ratio backspread, iron condor.

 

 

How We Ranked the Strategies

But did you know that there are different ways to trade earnings?

And that some strategies are better than others?

We’ll discuss what earnings are and how they can impact stock prices. We’ll also touch on the different types of earnings releases and how to trade them.

Earnings are the financial reports that public companies release on a quarterly basis. They include information such as revenue, expenses, and profits.

Investors use earnings to gauge a company’s financial health and to make decisions about whether or not to buy or sell the stock.

There are two types of earnings releases:

Positive and negative. Positive earnings releases usually result in a stock price increase, while negative earnings releases usually result in a stock price decrease.

The best options strategy to trade a positive earnings release is to buy call options. This strategy allows you to profit from a stock price increase with limited downside risk.

The best options strategy to trade a negative earnings release is to buy put options. This strategy allows you to profit from a stock price decrease with limited downside risk.

If you’re not sure which strategy to use, you can always hedge your bets by buying both call and put options. This way, you’ll make money if the stock price goes up or down.

Whichever strategy you choose, make sure you do your homework before earnings season. This way, you’ll be prepared to make the best possible trade.

 
Key Takeaway: Earnings are important to stock prices and there are different ways to trade them. Some strategies are better than others.

 

 

Number One: Buy Straddles Before an Earnings Announcement

If you’re looking to take advantage of an earnings announcement, buying a straddle is one of the best options strategies out there.

By buying a straddle, you’re essentially buying a call and a put at the same time, giving you the potential to profit no matter which way the stock price moves.

There are a few things to keep in mind when trading earnings announcements. First, make sure you know when the announcement is scheduled.

Second, be aware of the potential for increased volatility around the announcement. And finally, have a plan in place for how you’ll trade the announcement.

Number Two: Sell Puts on Overpriced Stocks Post-Earnings Announcement

By “overpriced” we mean stocks that are trading at prices that are significantly higher than their intrinsic value.

And by “intrinsic value” we mean the true underlying value of the company, as determined by factors like its earnings, cash flow, and assets.

The reason this strategy can be profitable is because when a stock is overpriced, there is a greater chance that it will fall after its earnings are announced.

And if you sell a put on a stock, you’re essentially betting that the stock will not fall below a certain price.

So, if the stock does fall after earnings are announced, you could profit from the difference between the strike price of the put and the new, lower price of the stock.

Of course, this strategy is not without risk. If the stock doesn’t fall after earnings are announced, you could be forced to buy the stock at a price that is above its intrinsic value.

Therefore, it’s important to do your homework before selling puts on overpriced stocks. You need to make sure that the stock is truly overpriced and that there is a good chance that it will fall after earnings are announced.

If you’re looking for a way to profit from earnings announcements, selling puts on overpriced stocks is one strategy you might consider.

 
Key Takeaway: Selling puts on overpriced stocks can be profitable if the stock falls after earnings are announced.

 

 

Number Three: Get Long a Stock Prior to its Earning Release

This way, you’ll be able to benefit from any upside that may occur from the release.

There are a few things that you need to be aware of before getting long a stock prior to its earnings release. First, you need to make sure that the stock is in a good position to benefit from the release.

This means that the stock should be in a strong uptrend leading up to the release. Second, you need to be aware of the potential downside risk that comes with getting long a stock prior to its earnings release.

This is because the stock could potentially gap down after the release if the results are not as positive as expected. Lastly, you need to have a plan in place in case the stock does gap down after the release.

This way, you’ll know how to exit the position if things don’t go as planned. Overall, getting long a stock prior to its earnings release is a great way to benefit from the release.

Just be sure to keep the potential risks in mind so that you can exit the position if needed.

 
Key Takeaway: It’s best to get long a stock prior to its earnings release to benefit from any upside. However, be aware of the potential downside risk of the stock gapping down after the release.

 

 

Conclusion

Each of these strategies has the potential to make quick profits or hedge against downside risk. So pick the strategy that best fits your trading goals and risk tolerance!

If you’re looking for options trading education, Epsilonoptions is the perfect place to start. We offer a variety of courses and resources that can help you learn about options trading and how to make money from it. Whether you’re a beginner or an experienced trader, we have something for everyone. So what are you waiting for? Check us out today!

Short Call Options Trading Strategy: How to Use It and When

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A short call options trading strategy is simply when you sell or write a call option on an underlying security with the hope that the price will fall so that you can buy it back at a lower price and pocket the difference as profit.For example, let’s say XYZ stock is currently trading at $50 per share and you believe it will fall over the next few weeks.

You could enter into a short call position by selling or writing 1 XYZ 50 strike Call for $2 per contract with expiration in 4 weeks.

If your prediction comes true and XYZ falls to $45 per share by expiration, then your Call would expire worthless while allowing you to keep the entire premium received as profit!

However, if XYZ rallies instead and ends up above $50 per share at expiration, then your Call would be exercised away from you meaning you’d have to purchase 100 shares of stock at $50 each which would offset any profits made from the option premium received.

What Is a Short Call Options Trading Strategy?

A Short call options trading strategy is a strategy where an investor writes or sells a call option on an underlying asset. This is generally done in order to generate income, as the investor will collect the premium from the sale of the option.

The downside of this strategy is that the investor is exposed to potentially unlimited losses if the underlying asset price increases significantly.

How Does a Short Call Options Trading Strategy Work?

The trader sells call options with the hope that they will expire worthless so they can keep the entire premium.

If the price of the underlying asset falls, the call option will lose value and the trader will make a profit. If the price of the underlying asset rises, the call option will gain value and the trader will lose money.

Why Would You Use a Short Call Options Trading Strategy?

If you’re an investor who is bullish on a particular stock, you may want to consider using a short call options trading strategy.

By selling call options, you can generate income from your stock position while still maintaining upside potential if the stock price increases.

There are a few things to keep in mind if you’re thinking about using a short call options trading strategy. First, you’ll need to have a solid understanding of how options work and the risks involved.

Second, you’ll need to be comfortable with the idea of selling call options, as this is a key component of the strategy. Finally, it’s important to remember that options are a leveraged instrument, which means that they can magnify both gains and losses.

As such, you need to be sure that you’re comfortable with the potential risks before implementing this strategy.

When Might You Use a Short Call Options Trading Strategy?

When might you use a short call options trading strategy?

If you’re bullish on a stock, you might use a short call options trading strategy to help limit your downside risk.

By selling a call option, you give the buyer the right to purchase shares of the underlying stock at a set price (the strike price) on or before a certain date (the expiration date).

If the stock price falls below the strike price, you keep the premium you received for selling the call option. However, if the stock price rises above the strike price, you may be required to sell your shares at the strike price.

Before selling a call option, you should be aware of the potential risks, including the risk of having to sell your shares at the strike price, the risk of the stock price rising above the strike price and the risk of the option expiring worthless.

You should also consider the potential reward, which is the premium you receive for selling the call option.

If you’re looking to limit your downside risk and are comfortable with the potential risks and rewards, a short call options trading strategy might be right for you.

Key Takeaway: Selling a call option can help limit downside risk, but comes with the potential risks of having to sell shares at the strike price and the option expiring worthless.

How Do You Choose the Right Strike Price When Using a Short Call Option Trade

When you are trading options, the strike price is one of the most important factors to consider. The strike price is the price at which the underlying asset is traded.

For example, if you are trading a stock, the strike price is the price of the stock. If you are trading a futures contract, the strike price is the price of the underlying commodity.

There are two main reasons why the strike price is so important. First, the strike price determines whether or not your option is in the money.

An option is in the money if the strike price is below the current price of the underlying asset. For example, if you buy a call option on a stock with a strike price of $50, and the stock is currently trading at $60, your option is in the money.

Second, the strike price also determines how much premium you will pay for your option. The premium is the price you pay for the option itself.

It is important to note that the premium is not the same as the strike price. The premium is the price you pay for the right to buy or sell the underlying asset at the strike price.

The strike price is an important factor to consider when you are trading options because it can have a big impact on your profits.

Key Takeaway: The strike price is an important factor to consider when trading options because it can have a big impact on your profits.

FAQ’s in Relation to Short Call Options Trading Strategy

How do you make money on a short call option?

A short call option is a bearish strategy where you expect the underlying stock to fall. You would sell the call option, and if the stock falls below the strike price, you would make a profit.

What is the maximum loss of a short call?

The maximum loss of a short call is the strike price of the call minus the premium paid.

What is the best strategy for option trading?

The best strategy for option trading is to buy call options when the market is bullish and to sell call options when the market is bearish.

Which option strategy is most profitable?

There is no definitive answer to this question as it depends on a number of factors, including the underlying stock price, the strike price of the option, the time remaining until expiration, and the volatility of the underlying stock.

However, in general, short call options are most profitable when the underlying stock price is below the strike price at expiration.

Conclusion

There you have it! A short call options trading strategy is a great way to profit from downward price movement while limiting your downside risk.

Be sure to carefully consider the underlying security, strike price, and expiration date when entering into any short call position.

Epsilonoptions offers the best options trading education for investors and traders. We provide top-notch services that include educational resources, market analysis, and more. Our goal is to help you become a successful trader by providing you with the tools and knowledge you need to make informed decisions. Contact us today to learn more about our services!

Buying Straddles Into Earnings

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Buying straddles into earnings is a popular strategy to trade the immediate move in a stock ahead of an earnings announcement.

Here’s our guide to this strategy and its pros and cons.

What Is A Straddle?

Straddle
Straddle Spread P&L Diagram

The investor buys both a put and a call option on the same stock with the same strike price and expiration date.

Example

For example, suppose Apple (AAPL) is at $150. You might buy 1 call and 1 put, both expiring in one month and with a strike price of $150, for $12 in total.

Now if APPL is greater than $12 away from $150 (ie greater than $162 or less than $138) at expiry you will make money.

Moreover the straddle has a positive delta and so any sharp move before then should increase the value of the trade and allow a trader to sell for a profit.

Why Buy Straddles Before Earnings?

Traders purchase a straddle to try to profit from a big price movement in the stock. The trader may think the stock will rise greatly or fall greatly based on some news, such as a an FDA ruling or a congressional hearing.

One other common catalyst for a big price movement is an earnings announcement.

Each quarter’s earnings being announced can cause the stock to rise or fall substantially if the earnings are significantly different to the market’s expectations.

Suppose, in the above example, AAPL is about to announce earnings, which you expect to be significantly better than the market analysts are predicting. You might purchase the above straddle and, if you are correct, profit on a big move should your prediction prove to be correct.

Risks & Downsides

There are significant downsides to this strategy:

You could be wrong about earnings

Firstly, of course, you could be wrong and the stock doesn’t move. In our example AAPL could announce earnings in line with market expectations and the stock move little.

Theta and Time Decay

The trade is negative theta; over time the trade loses value.

Thus our AAPL position above may start to decay, all things being equal, whilst we hold on to it waiting for earnings.

For this reason traders often purchase straddles close to earnings, knowing they’ll be out of the trade pretty quickly (even if the trade goes against them), and so time decay is limited.

Vega & Increasing Implied Volatility

Straddles are positive vega trades; they are positively correlated to changes in implied volatility, which is high just before earnings. This is as expected: this the market pricing in the potential for a substantial move (ie volatility).

Unfortunately, once earnings is complete, IV drops back to its ‘normal’ level. And the straddle, with positive vega, drops too.

Thus it is possible to own a straddle before earnings and still lose money after a big movement if this positive effect on the straddle, due to delta, is more than counteracted by the drop in IV.

So, for example, suppose earnings is announced just after we have purchased our $12 AAPL straddle. Good news: earnings we better than expected and the shares move to $156.

Due to the positive delta (of 0.65, say) our straddle should increase from $12 to around $16 (ie have an extrinsic value of $6 and a intrinsic value of $10)

But due to the collapsing volatility this intrinsic value falls from $10 to $5, giving a total straddle value of $11 (extrinsic value of $6 plus an intrinsic value of $5).

Therefore, despite the correct earnings call, we have lost money.

Alternative Trade To Buying Straddles Into Earnings

Some traders buy straddles before earnings, but sell before the earnings announcement.

SteadyOptions is one service using the long straddle strategy before earnings. But they always sell their straddles before the earnings announcement to avoid the IV crush.

This is mainly a positive vega and delta play. The trader is expecting volatility to rise, protecting them from any time decay, and hopes to profit from any movement before earnings (caused by speculation on those earnings etc).

The other way to think of this is that an at the money straddle price is ‘frozen’ in the 7-10 days before earnings. In our above example the ATM the money straddle would be $12 for several days before earnings. Time decay is being offset by increases in IV.

But that is only if the stock doesn’t move. If it does then, as it has positive delta, the price will rise. The trader therefore enjoys positive delta for ‘free’ for several days before earnings.

However, the trade has so many moving parts, this is a strategy for only the most experienced of traders.

Conclusion

Buying straddles in earnings is a popular trade, but requires a significant move after earnings are announced to be profitable due to the effects of vega and theta.

Buying a straddle and selling before earnings is another popular trade, but one for sophisticated traders only.

The Best Stocks To Write Covered Calls | Criteria & Examples

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Here are the best stocks to write covered calls. But first we consider exactly what a covered call is and what we need to look for in a stock to be used in the strategy.

The investment and trading behind covered calls might not be the most intuitive process in the world, but they offer important opportunities to make profits on an existing portfolio.

Because of that, any trader interested in a more diverse trading approach should consider them as an option. Here is a breakdown of writing covered calls, as well as a short list of ideas for stocks that could serve the same purpose.

Covered Call Explained

A covered call represents a position that includes shares of a stock, but also a call option on that same underlying stock. When a trader executes a covered call, a call option is sold (usually out of the money), but the trader keeps the underlying stock.

Covered Call Stock Selection

Stocks great for this strategy are those that are stable – volatile stocks might provide higher premiums due to elevated implied volatility but are difficult to manage. The sold call would often get called away on exercise.

The stock should also have decent long term prospects. The perfect covered call scenario is for the stock to move up steadily, but not by too much that it rises above the strike price of the sold call.

A regular series of options premium received, in addition to any dividends on the owned shares, plus a decent capital gain is the dream scenario.

Great Stocks For Covered Calls: Examples

Here then are some great stocks for writing covered calls

Verizon Communications (NYSE: VZ)

As one of the biggest companies in the domain of tech and communication services, Verizon Communications has two segments of operation.

One is focused on the consumers and the other on the business. More precisely, Verizon Consumer Group offers wireline and wireless communication services to consumers. Verizon Business Group provides institution-oriented solutions like network security, communication products, video and data services, Internet of Things (IoT) products, and much more.

All of these are sought-after and will continue to be needed both in terms of business and consumer perspectives.

The company expects a positive outlook in the coming period and even fluctuations in the tech stock will likely not change that in the long run.

So decent long term prospects, regular dividends plus few surprise moves make this a great choice.

Pfizer Inc. (NYSE: PFZR)

Pfizer Inc. is a global biopharmaceutical business that is focused on research. The same company is working in the domain of biopharmaceutical products, which covers their entire life cycle.

It begins with the discovery and development process of products like medical drugs, vaccines, and so forth. The cycle ends with the marketing, sales, and global distribution of these products.While it was always massive, the COVID-19 coronavirus pandemic brought it into the limelight on an unprecedented scale.

2020 saw it successfully develop a COVID-19 vaccine in a record timeframe and 2021 saw its total revenue increase 106 percent year on year. Prior to the pandemic, the stock of this global pharmaceutical company saw substantial growth. The coming period will almost certainly offer a similar if not stronger outlook.

As one of the biggest companies in the domain of tech and communication services, Verizon Communications has two segments of operation.

One is focused on the consumers and the other on the business. More precisely, Verizon Consumer Group offers wireline and wireless communication services to consumers. Verizon Business Group provides institution-oriented solutions like network security, communication products, video and data services, Internet of Things (IoT) products, and much more.

All of these are sought-after and will continue to be needed both in terms of business and consumer perspectives.

The company expects a positive outlook in the coming period and even fluctuations in the tech stock will likely not change that in the long run.

So, again, good prospects, regular dividends plus few surprise moves make this a great choice.

Ford Motor Company (NYSE: F)

Out of all three ideas for best stocks to write covered calls, Ford Motor Company is easily the most famous one. This automobile company has been around since 1903 when the legendary Henry Ford established it.

Presently, it works on designing and manufacturing Ford trucks, cars, and utility vehicles, as well as its line of Lincoln luxury cars. It has three different segments. The first is Automotive, which works on the development, manufacture, distribution, and services of its vehicles.

The second segment is Mobility, which operates in the domain of autonomous vehicles. The last segment is Ford Credit, which focuses on financing and leasing activities in the field of vehicles.

This huge automotive company has big plans for the future, including a heavy development of autonomous and battery-powered vehicles. Electric vehicles, which will definitely be a huge trend in the coming decades, could see the profits of Ford Motor Company rise significantly in the 2020s.

Additionally, the company will invest huge amounts into its battery research, development, and production. This will allow it to take on a bigger role in the technology market, making the potential for growth even bigger.

So, yet again, a good stable company with lots of potential for long term growth.

With these ideas for great covered calls stocks, traders can expand their portfolio and also find additional opportunities for generating a profit.

Best ETFs To Trade Options | ETF Options Perfect For Options Trading

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The best ETFs to trade options are those giving the required focused exposure to a part of the stock market and whose ETF options are liquid. Here are some great examples of great ETFs for options trading.

Great ETFs for options trading

US Index ETF Options

The first group are ETFs that offer exposure to a wide variety of US stocks – often tracking a well established index.

The are the best ETFs to trade options spreads related to market movements (or lack of movement in the case of some delta neutral trades).

DIA: SPDR Dow Jones Industrial Average ETF Trust

DIA: SPDR Dow Jones Industrial Average ETF Options

Probably the most venerable of the indices is the Dow Jones Industrials.

DIA is the related ETF which tracks this index, and thus offers exposure to the bluest of blue chip stocks which are low volatility and steady.

DIA’s options are therefore priced with a low implied volatility, making them attractive for option buyers in particular.

SPY: S&P 500 SPDR

SPY: S&P 500 SPDR ETF Options

SPY is the ETF connected to the S&P 500 index, often preferred to the DOW as a tracker of the market.
The DOW contains mainly old style industrial companies, whereas the S&P contains all sectiors such as technology and is therefore a better gauge of market sentiment.

Its options are the most liquid in the world due to their popularity in trading the performance of the top US companies.

Due to this liquidity the bid-ask spread for the most popular near term options is usually just a couple of cents.

IWM: Russell 2000 iShares ETF

The Russell 2000 index tracks a basket of small cap US stocks, and is a great way to obtain exposure to smaller higher growth companies.

Due to its higher risk, IWM (owned by ishares, part of Blackrock) is more volatile than SPY and hence its options have higher implied volatility.
They are therefore popular with option sellers who look to collect this IV, usually by positive theta trades which exploit time decay.

QQQ: Nasdaq QQQ Invesco ETF

QQQ: Nasdaq QQQ Invesco ETF

A good way to gain exposure to high growth (especially technology) companies is tracking the NASDAQ, which is exactly what QQQ does.

NASDAQ is the world’s second largest index and as such its options are liquid.

US Sector ETF Options

The second group offers exposure to a specific sector of the US stock market:

XLF: S&P 500 Financials Sector SPDR

The S&P 500 Financials Sector SPDR (XLF) ETF tracks financial stocks in the S&P 500 index, weighted by their market capitalization.

XLE: The Energy Select Sector SPDR Fund

A similar ETF for the Energy sector.

OIH: VanEck Oil Services ETF

An ETF tracking Oil stocks.

Geographical Market ETF Options

The third group of ETFs offer exposure to different geographical markets from the US:

EEM: Emerging Markets iShares MSCI ETF

The Emerging Markets iShares MSCI ETF (EEM) tracks ‘emerging markets’ – stocks from markets such as Brazil, South Korea and Mexico.

Due to their less developed nature, companies from such markets are inherently higher risk than similar stocks in the US.

As such their options contain high IV and offer high returns at a higher risk than those over US shares.

EWZ: Brazil iShares MSCI ETF

EWZ is a similar ETF to EEM except that it tracks performance in just Brazilian shares.

FXI: China Large-Cap Ishares ETF

As the name suggests FXI tracks Chinese stocks.

Non Stock ETF Options

The fourth and final collection covers ETFs in non stocks:

HYG: High Yield Corp Bond Ishares Iboxx $ ETF

HYG is an ETF tracking high yield corporate bonds.

It is popular with traders wanting exposure to high growth companies, but at a lower risk (not by much) than equity investments.

Its options are therefore a good way of trading expectations in the yields of high growth companies.

VXXB: Ipath.B S&P 500 VIX Short-Term Futures

The VIX is a measure of ‘average’ implied volatility across the option markets and hence is known as the ‘fear index’ (IV rises as investors become fearful).

Options over this index are therefore a strange beast: options over the IV in options.

However they offer a good way to gain exposure to expected changes in market sentiment and are popular.

Conclusion: Examples Of The Best ETFs To Trade Options

So these then are some examples of the best ETFs to trade options, but there are lots more. However most fall into the above groups and are a good selection of the main types.

Happy trading!