Your Earnings Season Trade Hack (Part 2)
In Wednesday’s issue, I showed you a simple way to trade a stock before its big earnings announcement.
Today, I’ll reveal how you can profit – even if the stock doesn’t move as expected following earnings.
You’ve already followed our earnings straddle trick. Now, after the announcement and the market has moved, you simply drop the loser and ride the winner.
If the numbers are a non-event, close out the whole play with a minimal loss of time value because you only had the position for a week and more than 60 days until expiration. The time decay will be minimal for the deferred option months in comparison the front month gamble for all-or-nothing winnings. Typically, options become more expensive as the earnings release approaches as buyers get more fearful of a surprise. To avoid much of the increase in volatility, enter into the straddle at least a week prior.
Important Rules to Remember:
Rule One: Play both sides with at-the-money options. The total cost of the Straddle (Call and Put) need to be less than 10% of the value of the stock.
Rule Two: Buy more time until expiration than you may need (at least two or three months for the trade to develop). Time is your greatest asset when you have completely limited the exposure risks.
Rule Three: After earnings, exit the option opposite the breakout move and manage the trend with the winner. The expiration option trade breakeven is the strike plus and minus the option premium total.
These breakeven thresholds should be less than 10% above and below the current share price with earnings data a possible catalyst for a multi-month breakout.
If nothing big happens in the stock, sell your straddle to close out and only lose a bit of time value since the options still have months until expiration.
It’s as simple as that.
Keep it In the Money,
Chart of the Day: Solar flames out
Solar stocks have been some of the market’s biggest winners since the group broke out over the summer.
The Invesco Solar ETF (NYSE:TAN) posted gains of as much as 85% following its early July breakout. But some individual solar names fared even better, recording huge, triple-digit rallies as speculators rushed into the sector.
One of those stocks is Jinkosolar Holding Co. (NYSE:JKS). JKS broke out last month – and never looked back. The red-hot solar name lit up the Street, recording gains of more than 200% in just about a month. Talk about a serious rally!
But it looks like JKS and some of the other strong solar names are in desperate need of a break.
Over the past couple of days, JKS has dropped a quick 25% from its highs. Remember: parabolic moves like this one do not correct sideways. That’s why we’re seeing such a sharp move lower now…
When you see a stock moving into extremely overbought territory and posting a chart that starts to look like a hockey stick, you expect an abrupt reversal to appear at some point as too many traders race for the exits with whatever profits they can carry…
Of course, there’s nothing wrong with trying to play a stock that’s screaming higher. But it’s important that you learn to recognize the signs of a stock that’s gone vertical. If you aren’t in these plays for the long haul, it’s best to remain aggressive when taking profits. You’ll rarely nail the top — but you will save yourself a lot of pain (and money) by taking gains off the table early and often.
All good things must come to an end. Eventually, the momentum crowd always abandons these sweetheart plays for the next hot ticket…
— Greg Guenthner