Earnings season strategies: What's your go-To options move?

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Will NVIDIA Rise or Fall? 3 tips for earnings season options trading!

squirrel in my pants joined discussion · Nov 20, 2024 17:02

Hello everyone!

This Wednesday, we're eagerly awaiting $NVIDIA (NVDA.US)$ Q3 earnings report—especially significant as it's their first since joining the Dow Jones Index.

Earnings season is like a market battlefield, full of rapid shifts that can bring joy to some and disappointment to others.

In these volatile times, capturing market opportunities isn't easy.

To thrive during earnings season, you need the right skills and strategies.

Today, I’ll share some tips to enhance your options trading success!

Click to enter the NVDA options chain>>

Tip 1: Performance outlook: Anticipate price movements

In options trading, the key to success lies in accurately predicting the future direction of stock prices.

So, how can regular investors gather useful information before an earnings release?

Let's dive into $NVIDIA (NVDA.US)$ stock page. Click on Company > Financials, and swipe up to find Q3 FY2025 Estimates and Analyst Ratings to review financial forecasts and various analysts' ratings for the stock.

Will NVIDIA Rise or Fall? 3 tips for earnings season options trading!

Analyst ratings: Follow the perspective of professional investors

As individual investors, we can leverage the insights of professional investors.

They conduct in-depth research on public companies, provide ratings, and predict target prices to help us understand market trends.

Consensus Rating: Helps you grasp analysts' general view of the company's fundamentals—whether it's worth buying, holding, or selling.

Target Price: Assists you in judging the price range for the company over the next year, providing a reference for your investment decisions.

Popular Analysts: Helps you find the "homework" of analysts with high success rates as a stock-picking reference. The more stars under an analyst's photo, the better their past performance, making their conclusions potentially more valuable.

Estimates: Key insights into performance

In the Estimates section, you can delve into the company's financial status. This data, sourced from S&P, is a reliable information source.

Revenue: Helps you assess the company's income trend.

Earnings Per Share (EPS): Provides a basis for evaluating the stock's potential value.

These tools give you a clear understanding of the company's fundamentals, helping you better assess stock price trends and potentially boost your options trading success.

Of course, I must emphasize that a strong performance outlook doesn't guarantee a stock will rise; it's merely a potential positive signal.

Similarly, a weak performance outlook doesn't mean a stock will definitely fall; it should be used as a reference, not an absolute guarantee.

Tip 2: Implied Volatility (IV): Be a buyer or seller?

For seasoned options traders, implied volatility (IV) is a familiar concept.

It represents the market's expectations for future stock price fluctuations and influences options pricing.

Simply put, when IV is high, options tend to be more expensive; when IV is low, they tend to be cheaper.

Generally, the market believes that, without considering direction (Delta neutral), you should consider buying options when IV is low and selling when IV is high.

Before uncertainties like earnings releases, market expectations often surge, with diverse opinions on future trends, leading to a spike in IV.

However, once earnings results are out and uncertainties lessen, IV usually drops quickly, known as the "IV Crush."

This is particularly evident with big companies like NVIDIA.

Thus, accurately assessing IV levels is crucial for successful options trading.

Before opening options positions, ensure you identify whether the current IV is already high.

Head over to $NVIDIA (NVDA.US)$ stock page and click Options > Analysis > Volatility Analysis to evaluate the overall IV level of the options chain. Click to enter the NVDA options chain>>

If you want to delve deeper into the IV percentage and IV rank shown on the chart, click the "i" in the top right corner for more information.

Additionally, here are a few strategies to combine with a proper understanding of IV, which can enhance your success in options trading.

Remember, investing carries risks, and strategies should be applied with caution. Wishing you great success in the market!

Buyer Strategies: You can choose to be an options buyer, purchasing options in advance to profit from potential significant price movements.

If you expect the stock price to rise significantly after the earnings release, consider buying a Call option.

If you anticipate a significant drop, consider buying a Put option.

If you're confident there will be substantial price movement but are unsure of the direction, you can buy both a Call and a Put, creating a Long Straddle or Long Strangle strategy.

Seller Strategies: You can choose to be an options seller, selling options when IV is high before the earnings release to collect premium income.

If you expect the stock price not to fall, consider selling a Put.

If you expect the stock price not to rise, consider selling a Call.

Furthermore, if you're confident that price volatility will decrease and stay within a certain range, you can sell both a Call and a Put, creating a Short Straddle or Short Strangle strategy.

While this strategy allows you to collect two premiums upfront, it carries the risk of losses if the stock price moves significantly in either direction.

Therefore, ensure you make accurate judgments before implementing this strategy.

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Tip 3: Options Unusual Activity: Monitor big traders' moves

Earnings season is ripe with opportunities. If you're unsure about which direction to take, why not check out "Options Unusual Activity"?

Options Unusual Activity refers to sudden, significant changes in the trading volume of specific options, which might indicate big investors' predictions about the market.

Why follow the big money? Because they often have advantages like:

– Financial Power: With substantial funds, they can dominate in the options market.

– Information Access: They have access to more comprehensive market data than regular investors.

– Technical Expertise: Equipped with advanced technology and professional teams, they can make more precise decisions.

Let's dive into $NVIDIA (NVDA.US)$ stock page. Click on Options > Options Analysis > Unusual Activity, and then use the filter to set conditions you're interested in, such as market sentiment, order type, implied volatility, or trade value.

Click to enter the NVDA options chain>>

Since we're betting on earnings, pay special attention to options marked with an "E," indicating that their expiration dates are around the earnings release. Focus on those with an "E."

Now, back to NVIDIA's unusual activity list:

On November 19th, Eastern Time, just a day before the earnings release, we noticed two large orders with a combined value exceeding $4 million. Such big moves usually have a significant market impact.

The system flagged these trades as "Floor" and "Multi-leg" strategies.

What's a "Floor" trade? These orders are typically executed by experienced professional traders on the exchange floor, using various strategies that are worth analyzing and referencing.

For the multi-leg order, the investor's strategy might involve using complex tactics to hedge risks or seize specific market opportunities.

Multi-leg strategies often involve simultaneously buying and selling multiple options to achieve a particular market expectation or risk management goal.

On November 18th, we spotted another large multi-leg order with a trade value of around $3.42 million.

This order involved buying a Call with a strike price of 150 and selling a Call with a strike price of 148.

Does this strategy look familiar? It's the well-known Bear Call Spread.

This strategy is typically used when the price of the underlying asset is expected to decline, but the drop is limited.

If NVIDIA's stock price falls to $148 or lower, the strategy will achieve maximum profit because both options will expire worthless, and the investor earns the difference in option premiums received when opening the position. Therefore, the maximum profit = $1.866 million minus $1.566 million = $300,000.

However, if the stock price rises above $150, the investor will face the maximum loss because both options are in-the-money. The call with a strike price of $148 will be exercised: this means an obligation to sell 100 shares of NVIDIA at $148. The call with a strike price of $150 will be exercised by the investor: this means they have the right to buy 100 shares of NVIDIA at $150.

However, since an option premium of $0.5 per share was received when opening the position, the investor's maximum loss is $150 - $148 + $0.5 = -$1.5/share * 600 * 100 = $90,000.

Let's watch and see if these strategies pay off!

Alright, that's it for today's sharing. The earnings season is full of opportunities, and the key lies in using information to safeguard your investments.

By keeping an eye on earnings forecasts, implied volatility, and options unusual activity, you can gain a better understanding of market dynamics and optimize your investment decisions.

If you have any questions or want to learn more strategies, feel free to leave a comment below.

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