Know how profit from volatility? It’s simple…
Calls are more than mere cash generators for those of you who own shares and want to pick up some extra scratch. They’re outstanding tactical tools for trading events.
Lululemon Athletica (LULU) announces earnings next week. This stock is on a roller coaster ride. The founder, who’s no longer running the company, is pounding the table about this problem and that problem.
This creates volatility, which in turn creates large premiums on the options.
How do you use this to trade earnings?
If you bought the shares right before the close on Friday at $67.24 and sold the 60 call expiring in two weeks—yes, the 60, calm down—you would collect $8.35 in premium. That brings your cost basis down to $58.89
If the stock sells off after earnings, goes down and stays above that point— that would be more than a 12% decline—you have a profit.
If you’re called out, you have a $1.11 profit. That’s 1.65% in two weeks. If you made this trade 26 times a year, that’s more than 40% on an annualized basis.
Downside protection, big upside potential.
Think about it.