The Wrong Side of Profitability During Earnings

Hey there, Power Profit Traders!

Yesterday I previewed my Rocket Wealth Initiative strategy and promised to show the criteria I use for finding these trades.

As a rules-based trader, I don’t place trades based on emotion – I have specific rules for opening and closing trades.

For instance, my A.I. “trigger event” software, BRUTUS, searches thousands of optionable stocks every day and gives me a list of trade opportunities with the highest ROI and win percentage.

I then narrow down that list based on multiple criteria to determine whether or not to trade the event, and which strategy to use.

I’ve spent a lot of time detailing Operation Surge Strike, and we have some fantastic setups coming next week – but more on that later!

For now, let’s talk about Rocket Wealth!

I’m going to use a few stocks to illustrate different aspects of the Rocket Wealth strategy – Campbell Soup Company (CPB),, Inc. (AMZN), and Stitch Fix Inc (SFIX) – and, more importantly, to outline some lessons on trading around expensive implied volatility (IV).

I covered all of this in detail during the Power Profit Trades LIVE session on Wednesday – and you can still catch the replay here.

Above-Average Implied Volatility (IV)

The first criterion for a Rocket Wealth trade is above-average IV.

Sound familiar?

Higher-than-average IV also happens to be a factor in many of my Surge Strike trades – whether I’m trying to capitalize on an IV surge that’s about to happen (like into earnings) or just happened (like after earnings).

The difference between the two strategies is that with Surge Strike we are usually buying options, whereas I like to sell put options via my Rocket Wealth strategy.

Increasing IV means options premiums are increasing. In other words, options traders are paying more than they usually would – sometimes double – just to open a trade!

So, your first lesson is to NOT buy options right before earnings because you are buying from people like me, and you’re getting in on the wrong side of probability and the wrong side of profitability.

Here’s a couple of charts that illustrate IV surges going into earnings, and the subsequent plummet:


Stitch Fix Inc (SFIX) with IV – March 10



Campbell Soup Company (CPB) with IV – March 10


Remember, you can still catch the replay of the entire Power Profit Trades LIVE session from Wednesday, where this was covered in detail!

First-Class Stocks and Correlation

Another criterion I’m looking for in Rocket Wealth is whether or not the instrument is part of an index, and if so, is it correlated with that index?

There are several reasons we look for stocks that are included in, and correlated with, an index.

We are primarily looking to place Rocket Wealth trades on what I call “first-class” stocks, and if a stock is included in the SPDR S&P 500 ETF Trust (SPY), for example, then it’s more likely to follow the overall market.

That brings us to correlation!

Correlation is about more than just “these two stocks are both going up.”

It’s actually measured mathematically, which many traders don’t realize, and determines how much price movement is in the same direction and of the same magnitude.

There are several formulas used to measure correlation, and the one we use measures on a scale from -1 (perfect negative correlation) to 0 (NO correlation) to 1 (perfect positive correlation).

For our purposes, we are looking for the two instruments to be as close to 1 as possible, preferably above 0.8, but there is some flexibility.

Here’s an example of, Inc. (AMZN) and its correlation coefficient of 0.893 when compared to the SPY!


AMZN to SPY Correlation Coefficient – March 10


If that stock’s correlation coefficient is statistically significant, like with AMZN, then we can use the index to give us an idea of where the stock may be moving!

Here’s an illustration of how AMZN, which is usually positively correlated to the SPY, makes its way back when it deviates from the SPY:





The Right Side of Profitability

As I mentioned before, buying options before an earnings event means you could be getting in on the wrong side of profitability.

Options premiums can increase dramatically just prior to an earnings event, and that means paying much more for those options than you would have just a week or two before.

One way to profit around these earnings events is to sell puts.

Selling puts when IV is high means options traders are paying you the premiums, which are excessively high right before earnings.

Take the example chart from above for Stitch Fix Inc (SFIX).


Stitch Fix Inc (SFIX) with IV – March 10


Now, let’s check how selling puts the day before earnings would have worked out!

I did this during the LIVE session on Wednesday, and you can watch the Replay if you want to follow along!

Here you can see I am selling $10-strike puts on SFIX:


SFIX Selling $10-strike Puts on March 7, 1 Day Before Earnings


Now, fast-forward to today and you can see where our profit would be for selling those puts just prior to earnings:


SFIX Selling $10-strike Puts on March 7, 1 Day Before Earnings


That’s All There Is To It?

I’m not going to lie to you, there’s more to it than this, and I covered a lot of what I look for and how I exclude stocks when looking for trades in the LIVE session on Wednesday.

The main lesson you should take from this is how important it is to understand IV and follow your trading rules, especially during times when market volatility has become this inflated!

If you don’t have a set of rules, check out Operation Surge Strike because we have some awesome new setups coming in the next two weeks and you will want to be a part of that!

Remember the Rivian Automotive (RIVN) trade I was talking about for weeks?

We closed that trade out profitably within 24 hours, and there’s another one coming up SOON!

I’ll be sending out more information about that on Monday, so keep an eye on your inbox!

See you Monday for our next Power Profit Trades LIVE session at 11:30 a.m. ET!

Tom Gentile
America’s #1 Pattern Trader

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