Next earnings season is right around the corner. Here’s a bold strategy to use for maximum returns.
Prime earnings traders new to playing the earnings game with simple call or put options often fret over the premiums present in options before the event.
Don’t worry, the option market often gets it wrong.
Earnings events are highly volatile and mostly uncertain. Sure, there are companies that manage expectations to perfection, but when operating results arrive, there’s often a surprise.
Those surprises are what drive the incredible share price moves after news is released.
Generally speaking, Earnings Players anticipate those moves and place an option trade immediately prior to the earnings announcement.
What happens when there are conflicting views on actual results, but a nearly guaranteed big share price move after?
Enter the straddle trade…
Instead of attempting to capture the upside of a one-sided earnings trade, a straddle—buying both a call and put with the same strike price and expiration date—can be lucrative, assuming the underlying stock moves more than expected.
Placing a straddle trade at the earnings event takes an incredible leap of faith, but the results can be astonishing.
Options prices soar before the news is released. In some cases, they soar to extraordinary heights. For example, $16 December expiration options for Pier 1 (NYSE: PIR) traded at a price requiring a 10% move in the stock to simply break even on the trade.
With Pier 1 having fallen dramatically in 2015 and heavily shorted, a move of 20% was more likely.
Typically, we’d let the Earnings Player road map lead us to the right side of the trade, but in this case, there was strong evidence supporting a move up or down in Pier 1 shares after the news was released.
Absent a clear direction on the trade and an expectation of a 20% move, a straddle trade on Pier 1 was the perfect strategy.
Sure enough, Pier 1 moved in a big way after announcing it missed earnings expectations.
The stock made the obligatory 20% move lower, allowing Earnings Players to pocket a tidy profit for their effort.
Not bad for a one-day trade that required little more than faith that the stock would move over 10% after results were released.
In this market, that outcome was about as sure a thing as you’ll find.