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We are in the midst of one of the most important earnings seasons to date.
The coronavirus has impacted revenue across the globe, and it isn't over. Now we're getting a glimpse as to how big that impact is.
The pandemic has left 174 million people unemployed worldwide, which has ultimately resulted in $2.1 trillion in lost income. Yet the Nasdaq just hit an all-time high of 11,069.
We don't know which way each stock will go after earnings, but we don't need to…
What we do know is there will be volatility in the coming weeks – and where there's volatility, there's opportunity. There are tons of gains on the table for your taking.
Today, I'm going to show you a strategy that allows you to secure profits no matter what direction stocks move on their earnings reports.
Then I'm going to give five trade recommendations to put this strategy to work now – plus, you'll want to get into the first one by Thursday…
Make Money No Matter What Direction a Stock Goes
Already, market bellwether stocks like Citigroup Inc. (NYSE: C), JP Morgan Chase & Co. (NYSE: JPM), and UnitedHealth Group Inc. (NYSE: UNH) have all announced higher-than-expected earnings reports.
Goldman Sachs Group Inc. (NYSE: GS) just announced earnings that were better than expected and gapped up.
But not all stocks are rising. Delta Air Lines Inc. (NYSE: DAL) dropped after announcing earnings that were even less than an already lowered expectation.
Even stocks within the same sectors are trading in different directions, which makes them hard to play. If you just purchase the stocks straight up, they'll have to rise for you to make money. And they'd have to rise a lot to see impressive profit.
But with options, you can profit in either direction.
- Call options profit if the underlying stock goes up with unlimited profit to the upside. If the stock drops, the risk is limited to what you spent on the option contract.
- Put options profit if the underlying stock goes down with unlimited profit to the downside. If the stock goes up, the risk is limited to the cost of the option.
See where I'm going…
When you combine a call option and a put option in a single trade, you have something that makes money if the stock goes up or down. And you're doing it with limited risk.
This strategy is called a straddle. If you haven't used this before, I'll walk you through.
Let's start with an example.
Back on May 13, 2020, I was looking at Expedia Group Inc. (NASDAQ: EXPE). It was seven days before earnings, and EXPE had a history of gapping at earnings.
The stock chart below illustrates EXPE over the prior two earnings periods.
Notice that EXPE gapped down on one earnings announcement and up the next.
This is a stock with a repetitive history, and a move – either higher or lower – was likely in seven days on the next announcement.
When you know the stock is likely to move, but it's not clear which direction, a straddle lets you play both directions.
In this case, we bought one call and one put: the EXPE June 26, 2020 $62 call and the EXPE June 26, 2020 $62 put for a total of $12.65, or $1,265 per contract. Note that the $1,265 debit is the maximum risk in the trade.
The magic of the trade is revealed in the risk graph below, which essentially translates stock price to profit or loss.
The stock chart on the left illustrates EXPE's volatility, how much the price moves in a certain time period.
The chart on the right, the risk graph, illustrates the combined effect of the call and the put together, which makes the straddle trade. The red arrows show you the price range in which this trade is profitable. You can see it's good for a big move in either direction. You're still making money whether the stock goes below $60 or above it. Given that the stock historically gaps at earnings in either direction, the probability of profit is high.
Here's what really happened…
When we opened the trade, EXPE was trading around $64.64. Then, before earnings, the stock gapped up to a high of $83.11 – providing a 48% profit in just seven days!
You can place straddle trades similar to this one. Just follow these rules:
- Find stocks that gap at earnings, meaning when they have big jumps.
- Buy an at-the-money (ATM) call and put on the stock.
- Pick an expiration date 45-60 days from purchase.
- Exit after the earnings announcement.
And now for a little "Christmas in July" present – I have listed six different straddle setups that have averaged at least 41.5% ROI over the past four earnings periods when entering seven days before the stock's earnings announcement. (Note that Expedia has already hit its pre-earnings seven-day mark, but the other five still have time.)
Some have seen gains as high as 154%, 189%, and 252%:
Be sure to confirm the date that the company is reporting earnings before you enter these trades. There are several resources where you can find this information, like earningswhispers.com or the company's investor relations page.
And in the meantime, don't forget to check out my latest opportunity to make weekly profits…
You see, since June 8, this group of readers has had the chance to take home six sets of profits by trading weeklies – and they all took just three days or less. They're that fast.
And the best part? I send readers a new weekly option recommendation every single Monday.
To learn how you can receive my next one, just click here.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.