Earnings season always presents us with some of the biggest stock moves we'll see all year. It's nothing unusual. A company crushes analyst estimates for its earnings, and the stock soars. Or it falls short, and the stock tanks.
For options traders, it's a dream scenario. These big moves in short periods of time are exactly where you can make a killing on an earnings trade.
And these moves could be even more pronounced this quarter. Even 66-year market veteran and Vanguard Group founder Jack Bogle says he's never seen volatility like what we have in the market now.
Sure, you could hold your cash and sit it out until the market calms down a bit. But if you do so, you'll be missing out on extraordinary gains.
That's why Money Morning's options trading specialist, Tom Gentile, is bringing subscribers two strategies to help you crush the market with your next earnings trade.
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While company after company so far this earnings season beat its estimates, not every stock simply went straight up. Just look at banking giants JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), and Goldman Sachs Group Inc. (NYSE: GS). Earlier in April, each reported better-than-expected earnings, and each stock jumped higher when the market opened following the news. However, by the end of trading that day, each closed with multiple percentage-point losses.
There are no guarantees how a stock will react to earnings. But with Tom's two options trading strategies, you can bank massive profits regardless of how the stock reacts.
Here are two of Tom's top strategies for trading earnings this quarter...
Earnings Trade Strategy No. 1
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How can you position yourself to profit when you're not sure which direction a stock will move after earnings?
That's where the straddle comes in.
A straddle is an options strategy you use to profit during times of market uncertainty or volatility. It involves buying both an at-the-money (ATM) call and an ATM put with the same strike price and the same expiration. An option that's "at the money" simply means that the stock price and the option's strike price are the same or very close.
When you buy a call and the stock moves higher by a lot, your call makes money. Your put will expire worthless.
The opposite happens if the stock moves lower by a lot. You put makes money while your call expires worthless.
The beauty is that if the underlying stock makes a big move in either direction, the profit you make on the winning option far outweighs the loss you'll take on the other. Consider the losing option to be insurance on your trade.
The only requirement for a profit is that the underlying stock must move one way or the other. Considering the environment today, the odds are pretty good that will happen.
But that's not the only strategy you can use to profit from earnings...
Earnings Trade Strategy No. 2
Tom also recommends long calls or long puts.
We can lump a long call and a long put together here, because predicting which way a stock will move after earnings is not necessary for this strategy. The idea here is to anticipate a pop or drop before the earnings announcement based on past history performance.
If you think the stock will fall ahead of earnings, you buy a put. If you think it will rise, you buy a call.
What's critical with these trades is discipline. You must get out of the trade before earnings are actually announced. Clearly, a surprise earnings announcement will likely result in the stock making a big move, but since you do not know if that will happen or how the stock will react, the risk of staying long in either option is too great.
And even if you bet wrong ahead of earnings, your loss will be limited. That's why long options are great tools for investors.
Pick the strategy that works best for you. Keep learning, stick to your plan, and you should come out of earnings season a bit richer than when you went in.
Best of all, Tom has just announced a new easy-to-follow trading system for his subscribers...
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