We all know that President Trump signed a $1.5 trillion tax cut into law in December, which was deemed the first significant tax reform signed into legislation since Ronald Reagan back in 1986.
We also know that all the talk last earnings season was that companies felt good about their future prospects from this tax law and the promise of less regulation from Washington, D.C.
That's also why many companies offered some nice bonuses to their employees and raised their earnings guidance, with some even announcing share buybacks.
But we're entering a new earnings season, and this optimism may not necessarily help drive the markets higher. It didn't help all stocks pop higher the last time around, either.
And when it comes to the markets, this next round of earnings could make or break volatility – and your trades.
That is, unless you know this lucrative strategy…
Why Using This Options Play Is the Key to Trading Through Earnings Season
There are three main things you should keep your eye on during earnings season:
- What the company's numbers are
- What they're saying about the effects of less regulation and the tax breaks
- If they anticipate those continuing to help their bottom line in coming quarters
Once you've got that down, the question then becomes which strategy should you use.
So how exactly do you trade around earnings without facing the risk of a completely unexpected outcome?
Use a straddle.
A straddle is an options strategy you'd use to profit during earnings season and also during times of market 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.
Straddles are actually the most popular way to play earnings and market volatility because they allow you to profit when the stock moves up or down. You can think of it like "straddling a fence," having one leg on each side. And since there's no limit to how high a stock's price can go, your profit potential is virtually limitless.
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.