Your Earnings Season Trade Hack (Part 1)
It’s that time again…
Over the next few weeks, earnings announcements will battle for our attention as the election approaches. So now is the perfect time to talk earnings season trading strategies!
How many times have you thought to yourself that a big stock move is coming — and the earnings announcement is going to be the price catalyst?
What if I told you there was a simple, low-cost strategy with a twist that can position you for both a breakout or breakdown move with limited risk?
It’s real. And I use it all the time! I call it the pre-earnings options strategy.
Here’s how it works…
Part I: Before the earning announcement
Earnings Straddle Trick
An earnings announcement surprise can trigger a large directional stock breakout either up or down. You can position for a significant price move with an options straddle strategy where you buy both a call and a put in advance of the data release.
Buying the near-term options straddle is pricing in event risk with higher volatility and therefore, a higher relative cost in the options.
The twist is to buy more time until expiration, minimum of 60 days than is needed for the specific event. This is so that the exit of the losing side can salvage decent premium. Then you can manage your option in the breakout direction to maximize the follow-through price trend.
That’s your pre-earnings announcement strategy. On Friday, I’ll show you a trick you can use after the announcement has moved a stock.
Keep it In the Money,
Chart of the Day: A “Wacko Market” rewards momentum
Mad Money host Jim Cramer kicked off the trading week by declaring that “we’re in some wacko market”.
Because, according to the energetic CNBC regular, “normally chasing stay-at-home stocks trading at off-the-charts multiples to sales would not make sense, but now the market is rewarding investors who do so.”
In other words, momentum trades are working! Sure, we can sit around complaining about high valuations. But I’d rather make money playing these hot stocks.
The last time we discussed the “work from home” sector, the September correction had taken a big bite out of this bull. Many of the red-hot work-from-home names plummeted following their strong summer rallies, causing a sharp pullback in the Direxion Work From Home ETF (NYSE:WFH).
But WFH has posted an equally impressive October comeback. These stocks are once again knocking on the door to new all-time highs…
Sector leaders such as Peloton Interactive Inc. (NASDAQ:PTON) and Zoom Video Communications (NASDAQ:ZM) are once again powering this group higher. As I wrote when first started to see signs of a sustained bounce earlier this month, we could continue to see additional gains in this group during the fourth quarter and beyond.
— Greg Guenthner