It’s been another busy week for the markets, with a new seasonal bearish pattern setting in and over 34% of all companies in the S&P are reporting earnings.
Remember, the volatility we’re seeing right now is completely normal – not at all out of line with seasonal volatility in July.
But during such a pivotal time, like earnings “Sweet Week,” it was important that we talked about the RIGHT way to trade earnings. To recap, these are the three steps you’ll want to take:
- Find the stocks that consistently experience a spike in implied volatility (known as IV Rush) ahead of earnings
- Place your trade a few weeks before the announcement
- Exit your trade at the close of the session BEFORE the earnings announcement
Now, earnings “Sweet Week” wraps up today with final reports coming from Apple Inc. (AAPL) and Amazon.com, Inc. (AMZN) after market close…
So, I wanted to take a minute to answer a couple questions – and a couple comments – I pulled from the mailbag, starting with an EXCELLENT one about earnings.
Let’s jump in.
Q: Hey Tom! Thanks for recommending straddles for earnings trades! Are there any other scenarios where a straddle could be useful?
Straddles are one the reasons why I love trading options – you can easily take a non-directional position that allows you to profit in two of three possible scenarios:
- If the stock goes up, you win.
- If the stock goes down, you win.
- If the stock goes nowhere, you lose
That’s why straddles are perfect for stocks experiencing IV Rush – because they have a very high likelihood of making an outsized move one way or the other.
Here are two more scenarios where straddles can be a useful tool for traders:
Economic Reports: Major economic reports and events – the quarterly jobs report, the release of the latest Consumer Price Index data, Fed meetings, and more – have been headline news for nearly two years as the economy has grappled with the aftermath of a global pandemic and persistently high inflation.
Straddles are a way that options traders can play how the markets react to these kinds of economic reports and announcements. And they can do it without having to predict what the next round of data will say or what the Fed’s next move will be.
Breakout or Breakdown Scenarios: In situations where a stock is trading in a range, but technical analysis suggests a breakout or breakdown is coming, straddles are a great strategy.
The S&P 500 right now is a good example. As I’ve said, I’m watching the 550 level because that’s where old support has become new resistance. At some point, the S&P is going to break above that 550 level or trade lower.
It has to go somewhere. A straddle is a great way to profit no matter which way it moves – if you can get the timing right.
Q: I don’t have your software (yet), so I set up your scan criteria within ThinkorSwim. I downloaded the stocks from the Pilot Project, also selecting “Only Optionable” as input. I selected only those with close greater than or equal to $100. I selected stocks with 1% difference between Daily High and Daily Low…
But I’m not sure about those stocks that correlate with the market. I took that to mean that Beta is close to 1. When I used Beta between 0.9 and 1.1, I only got 22 “hits.” That seems like a very small universe of stocks to be trading, so I think my assumptions must be inaccurate. Can you please explain further? And, I would still like to know what study/indicator(s) I can use to select that data.
A: Hey, way to go on following my videos and trying to duplicate my scans. What you’ve shared above shows me that you’re in the top percent of traders, so congrats!
As for my indicators, software doesn’t currently exist to find everything I use – a lot of which you haven’t even seen yet. That’s why I built my own that allows me to take the list that you downloaded and rank it by what correlates best to the SP500 or any index, stock, or list. While this may not completely answer your question right now, I want to come back to this again next week and talk about it in more detail.
Comment: Hi Tom, my goals for the next year are to help pay the mortgage, save for a new truck, and retire by the end of next year. I look forward to learn from you.
Thank you for emailing me! Goals are good because they set a foundation for getting from one level to another, especially in this business. That’s why it was one of the first things I asked you to do in Part 1 of the Patterns & Profits Cash Course. Let’s take it step by step… I am with ya! Cheers!
Comment: The 10 Essentials of Options Trading You Need to Know was very helpful. Thanks!
Hey, thanks so much for reading it! There’s more to come like this, including a special report every so often. In fact, I’m working on one right now that I’ll share as soon as it’s ready.
In the meantime, please continue to send me your questions, comments, feedback – what you’d like to see more of – because I read these every day. All you have to do is click here to send me a message.
Have a great weekend!
Good trading,
Tom Gentile
America’s Pattern Trader