Trading Earnings With Options: How to manage that risk!
It is no secret that people both new and experienced in trading get all worked up during earnings season. The allure of speculation amongst favorite household names proves to be too much for some to resist. We call these people degenerate gamblers. These people love the thrill of speculation, but ultimately, don’t have a clue as to what is going to happen once the earnings report has been released.
Not every trader that is trading during earnings is an unnecessary risk taker though. For options traders who take a hard pass on the risk debit trades like straddles and strangles present during earnings, they can turn to credit spreads. Chief among them is the iron condor. We talk about iron condors a lot in the swing trade and options course and during mentor sessions. They tend to be a popular subject due to their higher probability of success. I made a cheat sheet for those less familiar with the more common options strategies HERE.
This week, $NFLX and $GS both presented themselves as ideal earnings trade candidates. I have traded both names in the past and have always done well. The basic idea behind an iron condor is to capitalize on what is called the volatility crush. The volatility crush is what happens to options premiums after a known volatile event has taken place (earnings, in this case). We collect a credit for selling options premiums that are inflated (volatility) and then we buy them back lower, locking in our profit (volatility crush, post event). The trick is in identifying the perfect balance between the size of the credit and the probability of success for the trade. Risk versus reward, and just like that, the cycle of a traders due diligence repeats itself.
When setting up an iron condor trade, we are looking to pick short strike prices for our calls and puts that are far enough out of the danger zone of price action. Price action remained safely between our short strikes (blue lines). For more information on options trading and iron condors, subscribe to our Youtube channel and keep an eye out for more trade recap videos from this earnings season.
$NFLX daily chart after earnings with short strikes outlined in blue.
$GS daily chart after earnings with short strikes outlined in blue.
Trading Earnings with Options Video Recap – $NFLX & $GS