How to Trade Earnings with Options

12/17/2012 6:00 am EST


Andrew Keene

President and CEO, AlphaShark Trading

Andrew Keene explains how he uses weekly options to trade earnings reports.

My guest today is Andrew Keene and we’re talking about how you play earnings with options so Andrew, talk about that earnings are always a lot of activity going on.  How do you use options with that?

Yeah, I love trading earnings.  It’s actually one of my bread and butter and a specialty so basically what I do, I want to trade weeklies is possible.  I want to trade that catalyst and I wanted the position to be over.  However, not every stock has weeklies if that stock is not that active.  If it’s a little more liquid, I might have to play the whole month but if there’s weeklies probably around 120 stocks that have weeklies, I want to play the weeklies, get the catalyst over, and then I do a similar trade then I’d talk about when using a unusual option activity. 

Basically I look at the historical movement, how much a stock has moved over the last four quarters.  If the stock has sold off four times on earnings, I think there’s a better chance next time it’s going to sell off.  Then I look at the implied volatility so I use historical volatility implied volatility.  How are the options implying it’s going to move?  Then I have my measured move target.  I look at the money straddle and I make a measure move target to the upside and to the downside.  Then I look at the chart.  How does it chart?  Is it bullish?  Is it bearish?  Resistance, support, moving averages, volume, and I look at that to see how I line up for a trade.  Where do I think the stock’s going to go.  Then I place a trade on this. 

I’m a big spread trader.  I do some credit spreads, some butterflies, condors, calls, spreads, sometimes I do outright calls.  I place a trade based on that on a nice risk versus reward set up.  Every trade is different.  Sometimes I’m risking a little bit more.  Sometimes my reward’s a little bit more but I always have something set up for the catastrophic to happen.  CMG goes down $100, I don’t blow all my accounts so I set up a risk reward scenario and then I have basically the same thing as before.  I have my breakeven, want to know where the breakeven, resistance, support, moving average, and my time and target.  Like I said, if I’m playing earnings, I want to play the catalyst and get it over with.  I don’t want to trade the over on market so I would love to play the weeklies.  If there were weeklies in every stock, I’d trade weeklies in every stock and then I have a target of where I think the stock’s going to go. 

Alright, so are you playing these option trades into earnings and then getting rid of it right before or actually over earnings itself?

It depends on how it is.  Usually what I do, I put a lot of my earnings trades on about 10 minutes right before earnings.  A stock like Apple, Google, Amazon, they move so much on an intraday basis, I want to know exactly where it is right before the news comes out and I use this at-the-money straddles as a measure to move target to where it does.  I lot of times I like to trade call fives and put fly.  I’ve been trading Apple for six years.  Apple has moved 6.5% exactly five straight quarters so I can make a call or put fly based on it.  Before I go into any trade, I know when I’m taking it off.  So call in a put fly, I’ll take off half my position at a double, and then I leave the other half on until expiration.  If it’s a condor, usually I’m leaving on until expiration so it just depends on my strategy type but always before going in, I know my risk, I know my reward, and I know where I want to get out it. 

It sounds like you’ve got a checklist and you just go down this checklist and before you make any trade, everything has to be checked off. 

It’s called the HIMCRBTT trading plan actually so its historical volatility, implied volatility, measured move target, chart, risk, reward, breakeven, and then time and target so it is literally a checklist. 

I know our viewers are going to ask me again.  Say that again what it is.

HIMCRBTT - H is historical movement, historical volatility, or historical movement, I is implied volatility or an implied movement, M is my measured move target, up or down, I use that at the money straddle to get it, and then I have my chart.  Is the chart bullish or bearish, how does it look, then I’d look at my risk, my reward because every single trade I make, I currently have 60 positions on, I always want to have risk reward set up, breakeven, and then I have T&T, time, target.

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