Volatility Creates Opportunity

11/13/2013 6:00 am EST


Andrew Keene

President and CEO, AlphaShark Trading

Andrew Keene shows you how to trade earnings with options and demonstrates how he trades by watching historical movement over the previous eight quarters.

SPEAKER 1:  My guest today is Andrew Keene of KeeneOnTheMarket.com.  We are talking about trading earnings with options so, Andrew, why do you love trading options around earnings time?

ANDREW KEENE:  I love it because they always say that volatility creates opportunity.  I live in Chicago.  This is the best place in the world to trade.  It was voted by Traders Monthly as the best place in the world to trade.  I have never heard any trader in the elevator who said man I had the best day ever, the stock market didn’t move, right.  I want to see, I wish every single day the market would go down 500 points, then reverse, go up 1000, and then go back to unchanged, okay, so volatility creates opportunity.  In earnings, there is always increase in applied volatility.  It creates opportunities.  Now days, it is the best time ever for a retail trader to trade and the worst time ever for a marker maker.  There are weekly options and most of the markets are penny wide.  It means they are a $1.06 bid at $1.07, so I can get into a position and out of a position very, very easily and using weekly options, I can put on a great risk versus reward setups.  I set up a lot of call and put butterflies for earnings, on a measure and move target.  I can get 300% to 600% returns just in days trading earnings.

SPEAKER 1: All right, so I think a lot of traders when they are first starting out, they may buy a call on a company they think is going to have great earnings but you get more sophisticated than that, right, because we have seen a lot of times where they beat it by a penny and the stock just gets tanked for some reason.  It doesn’t react like you think so I am assuming that is why you use spreads and the butterflies to kind of protect against that.

ANDREW KEENE:  Yeah, exactly.  One thing I look at is I look at the historical movement.  How has the stock performed on earnings over the last eight quarters?  I personally do not care if they have been on the top line, the bottom line, or the guidance.  I just want to know, on earnings, has the stock performed well or does it sell off in earnings, so I actually do a bunch of webinars and workshops on earnings and trading around earnings.  Basically, you know, ULTA was a good example.  The stock has rallied seven of the last eight quarters on earnings so I look at that like a sports team.  That is a winning team.  I want to make a bet if the chart line is up that the stock is going to go up again, similar to Nike.  When the Nike bull (SP?) are set up, the stock has rallied five of eight quarters, okay, so I want to get long in that stock.  Then, there is a stock like TXI that has sold off six of eight quarters.  Well, I look at that as a losing team so I think their next quarter, I don’t care where the top and bottom line is.  Unfortunately, in trading, you don’t have to worry about those things.  All I want to know is how has the stock performed so I look at that historical movement and then I base a lot of my trading around that.  Is it a stock that generally moves the same percentage every time or sometimes does it move 30% and the next time 2%, and then I tweak my strategy around it.

SPEAKER 1:  So how do you kind of take a look at the strike price and decide I am going to go in the money, out of the money, when you are talking about earnings specifically?

ANDREW KEENE:  Yeah, so basically the one thing I do is I use measure and move targets.  It works best on the weekly options.  Sometimes I don’t take an earnings trade if I have to wait a whole month out.  I want to trade the catalyst and be done with it.  Let’s just take, for an example, XYZ.  We will say it is trading $30, okay, and we look at the money straddle, at the money call, at the money put, and say that is $3 total, okay.  That is going to give me two measure and move targets, to the upside, the $30 plus the $3 gives me $33, to the downside $30 minus $3, $27.  I will go to the historical movement.  I will see how the stock has performed.  I will look at the chart and then maybe I can put on it would be $31, $33, $35 call butterfly and call butterflies are my favorite,  out of the money call butterflies because I can put them on very, very cheaply, and then I can get that 500% to 600% return within days.

SPEAKER 1: Are you letting these positions expire or are you taking them off after they reach a profit target and how do you determine what that is?

ANDREW KEENE:  Yes, that is a great question.  It depends when it is.  My whole thing is I wish options expired actually every day.  I have a Monsanto position on that I have monitored it all week so if it is on Monday, I try to take off half at a double, but if the earnings are Thursday night or Friday morning, that is the best because then I can just sit and wait to see if that trade is profitable or not.  If it is earlier in the week or if it is a whole month out, I will take off half my butterfly at a double or half an iron condor for a double, let the other half ride until expiration.  If it is only like a day or two days left, then I kind of just let it ride.

SPEAKER 1: Andrew, thanks for your time.

ANDREW KEENE:  Thank you.

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