How To Trade Stock Earnings Like A Pro

How To Trade Stock Earnings Like A Pro


Earnings reports are extremely important for a company’s fundamentals, the overall market, and to see how that company might perform in the future. Of course, some earnings reports are more important than others. Big names like Apple and Microsoft make a big difference in the tech sector, while a penny stock will not affect the overall market. Traders love to play earnings, and usually, it isn’t the smartest thing to do. Luckily, we have a pretty good strategy that you can use to help swing the odds more in your favor. We’ll go over how to find important stock earnings, how to analyze the earnings, and then show you how to play earnings in a profitable way over the long term. Stick with us. There is a lot of key information to cover!!



Finding The Most Important Earnings
Earnings Whispers is one of our favorite websites to look at for earnings reports. They usually have all of the essential companies on a clean, easy to read chart. To see the significant earnings for the week, head over to the Earnings Whisper Twitter. They usually post a chart similar to the one below on Saturday or Sunday on Twitter. Following their Twitter account is a helpful way to find meaningful reports for the week. There are many ways to find earnings to look for, but this is our favorite method.
      

Earnings Analysis Tool On ThinkOrSwim  

Thinkorswimhas a fantastic tool we can use to analyze stocks that have upcoming earnings. We can do quite a bit on this platform, like look at the stock’s performance during its previous earnings, compare implied and historical volatility, compare how ATM straddles have performed, and more. But to find this tool, you must first click the “Analyze” tab at the top left that is between “Trade” and “Scan.” Then, click “Earnings” below that and to the right, as highlighted in the chart below.

 
Looking at this chart, at the top in the “Stock price” row, you can start to find patterns in how the stock moves as it starts to report earnings. In this case with Microsoft, there’s no specific pattern. However, sometimes you can find stocks that have obvious patterns which can provide a great trading opportunity.  We will leave the strategy up to you but this tool on Thinkorswimis extremely useful to look at.

  The “Volatility” row features two data metrics. The red (implied volatility) and yellow (historical volatility) lines are extremely useful to options traders. For the most part, if the yellow line is greater than the red line, options traders did pretty well over the underlying earnings report. However, when we see the red line above the yellow line, it is bad news for options traders. This is because the historical volatility was lower than what market makers were anticipating and options premiums got crushed. We can see looking at the chart below, that the red line was above the yellow line consistently.  
 
  


Buying options before earnings is generally a losing strategy. This is the main point we are trying explain. Sure, there is always that 10% of traders who can do well on earnings, but it’s rare (especially for retail traders). You can also see how the ATM straddles would have performed on this chart. The straddles are represented with the purple line, and you can see that straddles generally perform poorly when earnings are released.  
  

Why Traders Keep Losing On Earnings Reports  

 
 Why are most traders losing when playing naked calls and puts during earnings? Pricing is everything. Implied volatility almost always rises heading into earnings reports. The chart below demonastrates a great example with Apple’s stock. Implied volatility rises because market makers raise the prices of options because they know the stock is about to get really volatile when the earnings report is released. So even if the stock moves to the upside or downside significantly, the options (call and puts) usually lose value because the movement was already priced in. Then after earnings, the implied volatility usually falls back down as the stock calms down which hurts the value of options even more. So overall, it’s not a good idea to buy options before a stock reports earnings. Continue reading to see a safer and more profitable way to play earnings reports.  

The chart of Apple above is a perfect example of how Implied Volatility usually looks with earnings. I want you to focus on the blue bottom line, representing Implied Volatility. I went ahead and drew some blue arrows pointing at it to help you find it. I also drew a blue box around the day Apple reported earnings. Notice how the Implied Volatility started rising into earnings and then dropped off. The pattern where the IV is high before the earnings release and lower afterwards is exactly what people who buy options DO NOT want to see. IV falling hurts both calls and puts. That doesn’t mean you couldn’t have won on this play if you bought options, but the chances would have been very low. You would have needed some well-priced options with near-perfect timing.

    A Better Strategy To Play Earnings Like A Pro!!

SHORTING or selling to open put options is one of our favorite strategies to implement on stocks we like for the long term. When selling a put option, you can take advantage of the elevated levels of implied volatility which is exactly what happens when most stocks give their earnings report. This strategy is only ideal if you are comfortable holding the specific stock you are trading for the long term. If you are not okay with holding that stock for the long term, we do not recommend this. We have a lot of great videos on selling puts and here is one of them to get you started.

  Selling puts is such an amazing strategy. The entire StockedUp team sells puts. The strategy offers the perfect combination of risk, reward, and leverage. This article was made to help save traders from unnecessary earnings losses. If you need help trading or want to trade with a community, join the FREE StockedUp Discord Server!!