Happy Friday.
It’s been a wild week for the markets… all markets. Stocks, bonds, gold, oil, currencies, and cryptos have been all over the place.
Volatility is back. And it’s likely to stick around for a while. So get some rest this weekend. Traders are likely to be busy next week.
With that in mind… let’s look at one of the strategies that might come in handy over the next few weeks.
Here’s a good question from a Delta Report subscriber…
Earnings season is almost here and I haven’t read any discussion about upcoming earnings announcement trades. These could be lucrative with the higher option premiums present now that volatility is up a bit from last quarter. Is there an intent to recommend fast-turn earnings announcement trades via Delta Direct as the season gets underway?
– Steve C.
Hi Steve. Thanks for writing in.
Yes, I expect we will have several fast trades this earnings season. But they may look a little different than the trades we’ve done the past few quarters.
Rather than taking a position prior to a company’s earnings announcement, it looks like many of the opportunities this season are going to come AFTER the announcement.
For example… Lam Research (LRCX) – a semiconductor equipment company – announced earnings after the market closed on Wednesday. Prior to the close, my earnings trading algorithm signaled that the market’s reaction to the LRCX announcement would be negative. But I chose not to recommend buying put options on LRCX because the option prices were too expensive to provide a good risk/reward setup.
LRCX closed near $210 per share on Wednesday. The LRCX February $210 puts closed at $8. So, the option was pricing in a 4% move in the stock after earnings. In other words, LRCX would have to fall more than 4% in order to profit from buying this put option.
Instead of trading lower after its earnings announcement, LRCX gapped $8 higher on Thursday morning. The LRCX February $210 puts traded below $5. It looked like my algorithm was going to be wrong this time.
It wasn’t.
Within minutes of the opening bell, LRCX peaked and started to fall. The stock ended the day near $200 – down $10 on the session. The LRCX February $210 puts were trading above $12.
Buying the option at $8, with the potential of selling it for $12, does not offer enough reward to compensate for the risk of jumping in front of an earnings announcement. But buying the option for $5 or $6 once the announcement (and therefore the risk) is out of the way offers a strong risk/reward setup.
Given the number of reversals we’ve seen on stocks that reported earnings this week, I suspect this is the sort of trade we’re going to be making more often this season.
Delta Report subscribers can read more about this post-announcement earnings trade strategy in our special report, “How to Win 90.2% of Your Trades Every Earnings Season.”
Best regards and good trading,
Jeff Clark
P.S. Like I said, with volatility returning to the markets and earnings season right around the corner, next week is going to be busy for traders. And we at the Delta Report are no exception.
We’ll be poring over hundreds of charts, searching for low-risk, high-upside trade setups day in and day out – bagging triple-digit gains along the way.
And right now, we’re offering a subscription to the Delta Report for a fraction of the usual cost.
Reader Mailbag
Today, a note from a recent Delta Report subscriber…
I have grown to like your service. In particular I relate to the lack of hubris and realistic optimism. It takes character to publish naysayers and critical emails. It is a good as, and more dignified than, the fine print in a financial disclaimer. Well done.
– Michael P.
As always, feel free to send in your trading stories, questions, and suggestions right here.