Spring 2022 ER Season Kicks Off!

Understanding how Implied Volatility (IV) behaves in and around equity earnings reports is critical to designing successful option trading strategies.  IV determines the price of a stock’s options and is in many ways a measure of supply/demand or the risk sentiment of the market.  The higher the IV, the more expensive the premium of the option.   IV rushes in the days leading up and crushes the day following earnings.

For example, look at the below IV chart   Notice how IV rushed higher prior to and immediately crushed following the report.  When trading, we want to buy when IV is low and sell when IV is high.  (Note – this stock mentioned here is not being presented an opportunity…)

In my previous blog post “Using Iron Condors for ER Plays,” I gave an example of DAL as one of my favorite option strategies for ER’s.  This case study sold high IV.  Unfortunately it was subsequently a loser, however my position size could bear the loss as the play was entered based on potentially losing a maximum of 2% of my ER strategy account.

I also love to find directional setups in the days or weeks leading up to ER’s, most of which will be “Bull Pullbacks/Bear Rally’s” or “Triangles” in formation.  See our linked youtube video’s for a summary of this type of setup.  The goal of pre-ER directional trades is to get a double whammy both price direction and IV rush.

The current Swing Trading / ER Strategies group that meets every Sunday evening at OptionsPlayers.com was presented two opportunities, and Iron Condor on MS, puts on J.P. Morgan (JPM) and calls on Blackstone (BX) .  A post mortem analysis on JPM is below.

JPM

On April 3rd, based on a review of charts for stocks with earnings in the coming two weeks, JPM (ER scheduled for before market open on April 12th) was identified as a bear rally candidate.

The following trade plan was developed:

JPM posted a green candle on Monday, April 4th,.  However, it closed below the 13 eMA entry trigger.  Three contracts of the JPM Apr14 $132 were purchased at 15:43:00 for $1.65 each (total debit/risk was $495).  As soon as the order was filled a Good Til Cancelled (GTC) order was placed to sell two contracts for $3.30 each.

JPM did what was expected in the following two days and the order to sell two of three contracts at a double was filled.  The remaining position was one contract with a plan to either adjust or hold until just before ER.  On April 7th, it hit Target 1; the position was adjusted to a calendar by selling one JPM Apr08 $132 put for $1.38.  The $303 profit was locked in at this point.  The short put expired worthless on April 8th.  The remaining JPM Apr14 $132 put was sold per plan on April 12th for $3.10.  Total profit on this play was $613 (121.8% ROI).   Note that some members of the Swing Trading / ER Strategies group sold all their contracts on April 1st for a double.

Swing trading options before and during earnings can be stress free; risk can be limited with proper planning.  Always write a trade plan prior to entering a trade, follow it, and only adjust that trade plan when your emotions are in check so that decision making is made with discipline.  This will be a subject of future blog posts.

The Spring 2022 ER season is kicking off with some great gains.  Next week’s plays have been forwarded to the Swing Trading / ER Group and will be reviewed in a Live Stream on Monday evening at 7:00 PM Eastern.  We will also review all plays to date, listed below.

Comments on this post are welcome!

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