Options Strategies for Earnings Announcements

Views 1403Jul 9, 2024

People trade earnings to potentially profit from anticipated stock price movements following a company's quarterly financial report during earnings season. Earnings releases often trigger significant volatility as investors react to the company's performance and future prospects.

Traders aim to potentially capitalize on these price swings by buying or selling stocks, options, or other securities before or after the announcement, based on their analysis of earnings data and market sentiment. Read on to learn more about trading earnings with options.

Why consider trading earnings with options

Trading earnings with options can be an effective strategy for several reasons.

First, options offer a way to manage risk. When you buy options, your theoretical maximum loss is limited to the cost of the option (the premium). This can be especially appealing during earnings announcements, when stock prices can be highly volatile.

Second, options offer flexibility. You can choose different strike prices and expiration dates to fit your trading strategy.

Third, options can be used to hedge positions, helping to protect against potential losses.

Finally, options allow you to speculate on the stock's direction — up, down, or even staying flat — giving you multiple strategies to potentially profit from earnings announcements.

To keep up to date on when companies report their earnings, check out the Moomoo Earnings Calendar.

Trading earnings - key factors to consider

When trading earnings with options, there are several key factors to consider:

Implied volatility is a crucial aspect; high IV suggests significant stock movement but also makes options more expensive.
Risk management is also essential — consider strategies that limit potential losses, like buying puts or calls.
Consider the market's reaction to earnings announcements, as these can lead to large price swings and surprises.
Choosing the right expiration date is important for capturing potential post-earnings movements. Strategies like long straddles and strangles can benefit from significant price changes in either direction.
Finally, focus on options with good liquidity for easier buying and selling.

Stock forecast

A stock forecast can be tricky due to the uncertainty and potential surprises in the earnings report. Traders often look at various factors:

Past performance: How the stock has historically reacted to earnings announcements.
Analyst estimates: Comparisons between actual and expected earnings. Moomoo users can now access historical tracking of stock targets and detailed ratings from Wall Street analysts and institutions.
Market sentiment: The overall mood of the market toward the stock.
Company guidance: Insights from the company about future performance.
Macroeconomic factors: Broader economic trends affecting the stock.

Volatility forecast

Volatility forecast in trading earnings involves estimating how much a stock's price might fluctuate during earnings season. This forecast is essential for traders, as high volatility can lead to significant price movements, offering opportunities for potential profit or risk of loss.

Key factors impacting volatility forecasts include:

Historical volatility: Examining how volatile the stock has been during previous earnings reports.
Implied volatility: Current market expectations for future price swings, often peaking before earnings announcements.
News and events: Upcoming news or events related to the company that might impact stock movement.
Market sentiment: General mood and expectations of investors towards the stock.
Options market: Options prices can indicate expected volatility; high prices often signal anticipated fluctuations.

Options prices and earnings announcements

Options prices tend to fluctuate around earnings announcements due to increased uncertainty and volatility.

Before the announcement, option prices may rise as traders anticipate significant stock movements. Implied volatility, a key factor in options pricing, tends to spike as investors seek protection or speculate on potential price swings.

After the announcement, option prices often decrease as uncertainty diminishes. However, if the stock moves differently than expected, options prices can remain elevated or increase further. Traders analyze market sentiment, historical price movements, and implied volatility levels to make informed decisions about trading options before and after earnings announcements.

commission-free options trading on moomoo

Advanced options strategies for earnings

Options strategies for trading earnings involve techniques like straddles, strangles, and spreads. Traders use these aiming to profit from anticipated stock price movements post-earnings announcements. Each strategy has unique risk and reward profiles, allowing traders to tailor their approach based on market conditions and their risk tolerance.

Straddles

A long straddle is a strategy for traders who anticipate a big price swing in a stock but aren't sure if it'll go up or down. In a long straddle, they buy both a call and a put option for the same stock, at the same strike price, and with the same expiration date.

If the stock moves significantly in either direction before expiration, they could potentially profit. However, if the stock stays steady, they might lose some or all of their investment.

This approach can be handy during earnings announcements when stock prices tend to be more volatile, though options expiring after such announcements could be pricier.

Strangles

Just like a long straddle, a long strangle is a strategy used in options trading to potentially capitalize on significant price changes in a stock. The key distinction between the two is that while a long straddle usually involves buying call and put options at the same strike price, a long strangle involves purchasing options with two strike prices that are close together but different.

Call and put spread

Trading earnings with call and put spreads involves using options to potentially capitalize on anticipated price movements after a company's earnings announcement. These strategies come in both bullish and bearish forms:

Bull call spreads entail buying a call option and simultaneously selling another call option with a higher strike price. This strategy may profit if the stock rises.
Bear call spreads involve selling a call option and simultaneously buying another call option with a higher strike price. This strategy may profit if the stock falls or remains below the strike price of the sold call.
Bull put spreads involve selling a put option and buying another put option with a lower strike price. This strategy may profit if the stock remains above the strike price of the sold put.
Bear put spreads entail buying a put option and selling another put option with a lower strike price. This strategy may profit if the stock falls.

These strategies aim to benefit from the stock's price movement while mitigating potential losses. Bull spreads may profit if the stock rises, while bear spreads may profit if the stock falls. Traders assess market sentiment, implied volatility, and historical data to select appropriate spreads and manage risk more effectively.

Collar

Collar trading involves simultaneously buying protective puts and selling covered calls to help protect against downside risk while generating income. This strategy is named as such because the investor is already long the underlying stock. By owning the stock, the investor can sell a call option to generate income and use part or all of this income to purchase a put option, depending on the premium received for the call and the cost of the put. This can help mitigate potential losses. This combination creates a "collar" around the stock's price, restricting both potential losses and gains.

First, purchase a put option for downside protection. The protective put may help mitigate losses if the underlying stock's price declines, depending on the strike price of the put. For instance, if the underlying stock is at $50 and the put is purchased with a strike price of $45, a drop to $46 might not trigger the put's protection, as it could expire worthless. Then, sell a call option to potentially generate income while agreeing to sell the stock if it reaches the strike price and the option is exercised.. The covered call can potentially generate income but caps potential gains on the underlying stock and could result in the stock being called away if the option is exercised.

This strategy allows traders to potentially benefit from market fluctuations, such as minor upward movements generating income through the call option and protection from downward movements through the put option. However, the degree of protection depends on the strike price of the put option. It only offers true protection if the put is placed at-the-money. This may be an appropriate strategy for risk-conscious options investors as it can safeguard against significant losses while providing limited profit potential.

How to trade options using Moomoo

Moomoo provides a user-friendly platform for trading options. This general step-by-step guide below can help you get started trading options.

Step 1: Navigate to your Watchlist, then select a stock's "Detailed Quotes" page.