Without question, the most reliable and consistent trading pattern on the planet is earnings. Big things happen at and before earnings for many stocks.
Many stocks gap at earnings. Netflix (NASD: NFLX) gaps all the time.
But in particular, it gaps before and after earnings, as you can see in this chart.
Notice that NFLX moves big up AND down into earnings. There are many other stocks that behave the same way.
When you’re trading these stocks, you may be tempted to pick direction and trade the run into earnings or even past earnings to play the gap.
If you pick direction correctly, you can bank.
Picking direction, however, is a bit like “betting on the black,” winning big if you’re right and losing big if you’re wrong.
In other words, earnings roulette. And who wants to play that?
Instead, I’ll give you 3 quick action steps to take that will help you profit during earnings no matter what.
A Quick Look at a “Roulette” Trade That Didn’t Go So Well
on 2/20/20, Marriott (NYSE: MAR) was 6-days away from earnings on 2/26/20. The prior earnings period MAR had run up into earnings.
It would be reasonable to assume that MAR would again run up into earnings.
On 2/20/20, MAR was trading at $146.84. You could have purchased a MAR April 3, 2020 $147 Call option for $5.05.
By earnings, MAR was trading at $120 after gapping down before earnings. Why? Covid hit and hospitality stocks tanked.
The MAR April 3, 2020 $147 Call option was worth about $1. That’s an 80% loss over 6 days!
What if I were to tell you that we could have made a lot of money on this trade and made it if the stock went up or down?
Yes, that’s right…we could have made money on this drop, and also made money had the stock gone up.
Eliminating the “betting” aspect of this trade entirely.
3 Steps to Profit On Earnings No Matter The Direction
I do this all the time with an option trade called a straddle. We buy a call option in case the stock rises and a put option in case the stock drops, straddling direction and making money both ways.
I straddle direction into earnings all the time on the right stocks. I have historical scanners that find 100% historical winners and provide me the optimal day to enter.
So, here’s what we actually did with MAR on 2/20/20, 6-days prior to earnings.
The total cost of the trade was $10.50.
The profit and loss profile of the trade is revealed in the following risk graph:
This graph translates stock price (vertical access) to profit or loss (horizontal access). Notice that if the stock moves either way, there is profit.
Now, let’s look at this trade on the exit date of 2/26/20 (before earnings were announced).
The straddle we originally purchased for $10.50 was worth $28.53, a 172% ROI. The puts alone were worth $27.60.
My system is simple. Just three steps, all easy to follow.
- Enter an At-The-Money (ATM*) Straddle about 7-days before earnings.
- Buy first expiration date after earnings date.
- Exit the last hour of the trading prior to the announcement.
*Note: ATM = strike price closest to stock price.
Now, I only use straddles on stocks that have a history of running big (up or down) into earnings and use scanners to find them. You’ll want to do your research and find the ones that work the best historically.
It’s a problem I’ve already been hard at work on…with truly amazing results. My team of literal rocket scientists and I just finished back-testing our latest creation – a brute-force algorithm designed to capitalize on the historic trade volume and stock prices we’ve been seeing.
I call it BRUTUS – and it’s uncovered opportunities for 300% returns in 3 days… 650% in 8 days… even 2,500% in 16 days during the back-testing period! I’ve got the full story here for you.
Talk soon,
Tom Gentile
