As an options trader in these environments, shifting strategies might be necessary while companies are reporting their earning. These are some of the popular options strategies during earnings season.
Many traders are currently shifting to several options strategies during company earnings seasons. Especially during the pandemic environment, the FAANG and tech industry continues to post positive returns. Typically, these results are followed by many reports in banking, healthcare, industrial, and others. Naturally, the quarterly earnings reported by various companies can have a major impact on the market. As an options trader in these environments, shifting strategies might be necessary while companies are reporting their earning. These are some of the popular options strategies during earnings season.
Many traders harness the power of options by buying calls instead of basic shares. These call options enable, but don't require, traders, to buy stocks, bonds, or other assets at a predetermined price within a specified time period. For example, traders can maximize their investment efficiency on high share prices utilizing long calls to reduce the price of buying a set number of shares. Using the options delta of the call, traders receive many more shares using margins. Of course, the share price must reach the selected call's strike price to profit. Surely, traders stretch their investments and maximize the efficiency of their shares using long call strategies.
Iron condors are a second options trading strategy used by many traders during earnings seasons. They are simply combinations of two out-of-the-money vertical spreads and are often used to profit from expected implied volatility collapses. For example, a trader sells a 125-strike put to buy a 120-strike put, in addition to selling a 100-strike call for a 105-strike call. When earnings are released, the implied volatility often drops, and short option profits typically offset long option losses. This is, of course, assuming the stock does not surpass either spread strike. Many investors mitigate this risk by keeping the increments between their options purchases small. Absolutely, investors capitalize on implied volatility collapse opportunities using iron condor strategies.
Vanilla options are a third strategy used by many investors during earnings seasons. When bought, vanilla options give their buyers the ability (but not an obligation) to buy either a call or put of a financial instrument at predetermined prices and dates. This way, they provide diversity and versatility for traders of all experience levels by allowing them to determine strike prices, maturity, and trading instruments. Additionally, many traders mitigate their risks by determining their own maturity levels and options trading instruments. Certainly, traders provide themselves with significant risk mitigation and trading versatility using vanilla options.
A fourth trading option used during earnings seasons is known as straddling. Many traders implement this strategy to avoid the risk and frustration of attempting to guess which direction a stock will move during a busy earning season. Investors simply buy-to-open both a call and put on the same stocks at the same strike prices and expirations. This way, several variables are removed from the equation, and traders benefit regardless of the direction the stock moves. However, buying both calls and puts with the same parameters as this often requires significant capital and/or underlying holdings. Investors offer capital growth regardless of how a stock moves using the straddling strategy. This is an options strategy used as big tech earnings loom with unpredictable movements ahead.
Lastly, married puts are a common earnings season options trading strategy. Investors buy shares of an underlying stock, then immediately buy out-of-the-money put options against those stocks. This strategy often serves well as a hedge against massive selloffs. Additionally, traders benefit from this strategy regardless of how the stock moves. If it declines in value, the puts increase in value. If the stock improves, the puts lose value, but these losses are offset by improvements in underlying share prices. Of course, traders hedge against large selloffs and protect their investments regardless of the stock's direction using married put strategies.
There is a myriad of options trading strategies for a company earning seasons. For example, traders stretch their investments and maximize the efficiency of their shares using long call strategies. Second, investors capitalize on implied volatility collapse opportunities using iron condor strategies. Third, traders provide themselves with significant risk mitigation and trading versatility using vanilla options. Next, investors offer capital growth regardless of how a stock moves using the straddling strategy. Finally, traders hedge against large selloffs and protect their investments regardless of the stock's direction using married put strategies. When searching for options strategies traders are shifting to during earnings seasons, consider the strategies described above.
This article is written by Rajib Ghosh.