A few weeks ago I wrote a blog post on stock earnings season and a trade that I was in, ASML. The stock fit what we would consider 'Pre-Earnings' trading criteria and it ultimately led to an $11,000 profit for me when it was all said and done.
What we'll do is review a bit of this trade in this post then touch on the points of why earnings season is so powerful. I do want to start by saying that this (or any strategy for that matter) should not be your only strategy. It's one of about five that I employ in the equity options markets. Can you simply trade only earnings events? Sure, some with busy schedules do and it's viable.
Let's take a look at the trade entry before the earnings event.
The idea here was that I want to be long the stock before the event. Amateur and retail traders tend to want to own assets after price has appreciated - You know, after everyone in the room looks around at each other and makes a group approval that it's now 'safe' to do so. It's the opposite from what most trading books attempt to teach. Now on this trade I selected to purchase 50 call options for around $15,000 total cost and of course there are other ways to structure the trade but this particular situation called for this.
Below is the ASML trade profits as well as some additional pre-earnings trades. Paypal is a current one and another trade on it will be placed next week as we discussed in this video here.
I exited out of some of the contracts after it traded higher, this is called 'scaling' and something we do to reduce risk and secure profits. As we approached 1/18 it hit my final target so the rest of the contracts were sold. Now this is important here for directional trading and something, again, trading books never talk about. When you're trading stocks the exit is not as important - a few pennies here and there are not a big deal. When you're trading options, especially in the size I was, the exit is very important. I look to take profits into the price target not as it gets there and slows.
Now after exiting my full position the stock abruptly pulled back and then had earnings. The stock proceeded to gap up and trade much higher as seen on the chart. The retail trader usually will make a bet the day of on earnings when Implied Vol. is already too high at times it works, but it's really like playing Russian roulette. Now as we trade at $205 here, where most retail traders now want to enter, or maybe enter after earnings, I am looking to sell premium or short this in the coming weeks.
Conclusion. It's important to look for these trades weeks ahead of actual earnings. It's even more important to find price targets before the trade so that you can define the risk and from there, know how to structure the trade.
I hope this helped.