Using Options to Trade Earnings

02/24/2014 6:00 am EST


Andrew Keene

President and CEO, AlphaShark Trading

Trader Andrew Keene explains the method that he uses to trade earnings with options.

TIM:  My guest today is Andrew Keene, and we're talking about trading earnings and his strategies for doing that.  Andrew, there's a lot of different ways to trade earnings out there.  Talk about how you do it. 

ANDREW:  I love to trade earnings.  When I trade earnings, I want to take weekly options.  A lot of time if it doesn't have weekly options or the week of expiration, then I don't trade them.  I'll basically want to pinpoint that catalyst and to make a trade based on the catalyst, so basically what I do, very simple easy strategy, I look at the at-the-money straddle on the options, so let's say XYZ is trading $30, I can add the price of the calls to the price of the puts, let's say it's $3, okay.  They are giving me a measured move target of $3 either up or $3 down, 27 or 33.  I go then look at the historical movement over the last eight quarters, eight quarters is two years of data, and I see how the stock has performed. 

I compare it to, I have so many different analogies in trading, I compare it to a sports team, okay.  I compare it to the Cubs from Chicago.  Are the Cubs a winning trade or a losing trade, you know.  Are the Cubs consistently winning or are they consistently losing?  As a stock, as a company, I don't really care what their top and bottom line is, all I care about is how the stock performs that day after earnings, so consistently, like Alter (SP?) is a perfect example.  They do hair products and perfume, I don't really care about that.  Eight of the last nine quarters it has gone up on earnings, so I'll then tweak my strategy, bullish or bearish, on those criterias. 

TIM:  All right.  How are you kind of funneling down the stocks that are in earnings seasons?  There's a lot to choose from there.  How are you kind of whittling it down to the ones you're really going to target? 

ANDREW:  Easiest ones, weekly options, so I want to trade stuff with the weekly options.  I think there's around 200 stocks with weekly options now.  If it is, like Alter (SP?) doesn't have weekly options but if earnings are the week of expiration, it's the same thing as a weekly, so I look at the weekly options.  I want to trade something that has the markets pretty tight so there's a lot of liquidity out there.  The banks are great examples, those are always penny wide; Apple, Google, so I'll basically employ every strategy, just want to make sure that I can get in and out of my position. 

Like I said, I employ every different strategy.  I do a lot of out-of-the-money call and put butterflies on a measurable target, so if the stock was going to get to 33, maybe I'd buy the 31, 33, 35 bull call fly. 

TIM:  And when would you do this, the day before earnings, the week of, and then when do you sell? 

ANDREW:  Usually I do it about a half an hour before earnings comes out because I really want to see where that stock is going to settle right before earnings, so I don't do it a week in advance.  I do it just right before earnings and this works absolute a hundred percent best on a Thursday because it only has one day where the measured move target is going to work.  I want to pinpoint the catalyst.  I don't want to have a catalyst event and then see what the stock market does.  If Amazon goes up a lot in earnings, I have a bullish trade, but then the mark rolls over it could actually jump from a winner to a loser, so I really want to pinpoint that catalyst so it works best when they have earnings Thursday night or even Friday morning. 

TIM:  All right.  Where does somebody find out more about this? 

ANDREW:  You did go to my web site,

TIM:  Andrew, thanks for your time. 

ANDREW:  Thank you. 

TIM:  You're watching the video network.

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