December 14, 2017

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Trading Earnings with Options:  Part 2

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The Reality of Trading Earning with Options: Part 2

By, Dale Brethauer


Hello, this is Dale.  In part 2 of this free course, we’re going to continue to talk about the implied volatility crush and whether we can attack that with a short iron condor or a long straddle. Let’s get started!

Trading Earnings with Options Recap: Implied Volatility Crush

Every quarter we go through earnings season, a time when public companies announce their performance and give their guidance for the coming quarter. This is a highly anticipated, yet nervous, time for investors because they either get confirmation of a company’s strong growth or news of a slowdown in revenues and profits.

Here we see, on the lower portion of the chart of the Google, implied volatility plotted. Notice that doing earnings, immediately following earnings, the volatility drops like a rock. The market makers know that earnings are a highly anticipated time and they will increase the price of the options. Then immediately after earnings that volatility will drop like a rock.  It’s known as the IV crush.




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Strategy 2 | Iron Condor


We’re looking for a strategy to take advantage of that. Let’s look at an iron condor. The iron condor is an option-trading strategy using two vertical spreads, a put spread and a call spread with the same expiration. The condor is essentially selling both sides of the underlying instrument/equity by simultaneously shorting the same number of calls and puts, then covering each position with a purchase further out of the money.

video reference:

This is an option chain for IBM. IBM was currently at $170. We went out-of-the-money and sold the 165 and bought the 162.5 puts and then sold the 175 and bought the 177.5 calls. Both positions are protected by the put and call that we bought.  This iron condor had $0.88 worth of credit.

This is what an iron condor risk profile looks like at expiration. This is the profit zone. If you’re between the two break-even points by the time it expires, you profit all the credit.

The long call and put protects us from risk when the price would go way out of bounds. The short iron condor is a position that allows us and protects us against the catastrophic move one direction or the other.

Take a look at IBM earnings.  It dropped to about $160.  Well, is our short iron condor going to help us on that? Remember we sold the 165 and sold the 175 call and put, so we had a 10-point spread there.

We ended up with a debit of $2.33. We lost 164 percent in an hour.


Strategy 3 | Long Straddle/Strangle


Okay. Well, how about the long straddle or strangle? A long straddle/strangle involves going long, buying both the call and the put of the same underlying security. A straddle is buying the put and call at the same strike price and the options expire at the same time.  A strangle the options are at different strike prices.  These setups have limited risk and unlimited returns.

Video Reference:

What I did was go out to the 165 and I’m putting a strangle on IBM. Then, you can see that IBM indeed did have that big move. It also had the implied volatility crush which worked against us, but. we ended up making money because we paid $5.78 or $578 per option contract and sold at $8.45. That’s 46 percent in hours.
Finally, finally we have something to beat earnings.

Not so fast.  Let’s take a look at Rockwell Automation. It had the IV crush immediately following earnings. You can see it was right around $160. What we did is we bought a straddle both at the strike price of 160.  Remember, we bought a put and a call. It cost us $8.60. It didn’t move enough to cover the cost of the call option. We had to swell the straddle at $6.28 to get out of that trade, 30 percent in an hour. No way. No way.





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The strategies I’ve covered in both parts of this video course I have back tested with even more unfavorable results (3/4 were losers that I could cover without boring you, but my research found higher percentage of losers than that).  Earnings are a gamblers game, and you get better odds picking black at a roulette table (they wont charge you commissions either).

Gambling is not trading, if you want to become a successful trader its better to steer clear of this ” trader bait” and implement the strategies where you have an edge.  I’ve found mine and I teach the 2 most powerful to my members with courses, nightly reviews, real-time alerts, and monthly meetups.

I hope you enjoyed this free course and there are many more to come.  If you have a suggestion for free courses or blog posts please don’t hesitate to send a suggestion via our contact page or the messaging form at the bottom of the free members page.  All the Best!




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