VLAD KARPEL CEO AND FOUNDER, TRADESPOON

EARNINGS SEASON TRADING CHECKLIST

The most popular strategy among active options traders is to sell options premium right before earnings announcements. We can benefit from the discrepancy between actual and implied volatility in the underlying stock. As long as the stock does not move beyond our “estimated move” based on options data, we can make money. Our approach is to overlay IV Rank with our models to predict the direction of the stock before and after the earnings announcement. This way instead of just relying on delta for probability of success we are pushing odds in our favor by performing detailed statistical analysis based on neural networks that helps us separate the best-performing stocks from the weakest stocks.

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INTRODUCTION

Leveraging the Tradespoon Probability Calculator –  If you already have a position right before earnings announcement, you should utilize our

proprietary probability calculator. If you have options with at-the-money or near-the-money strikes, you have a 50/50 chance of making money, Unless you have a strong opinion on what will happen during the earnings announcement, close your at-the-money options.

–  If you are still have bias toward the earnings announcement or you want to participate in

earnings play, restructure your trade so the probability of success of your trade is greater than 70%. This way instead of trading at-the-money options, you are selling options premium for strikes that are trading farther from where the underlying stock is trading

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CHECKLIST - STEP 1

Trade Size and Options Requirements

–  Keep in mind that when you place trades with a high probability of success, you are trading out-of-the-money options (strikes far from where the stock is trading) and hence taking bigger risk.

–  Your broker will hold requirements to support riskier trades. This means that you have to

consider how much of your money your broker will hold aside and you want to make sure that the requirements never exceed 5% of your portfolio. This will ensure that you are making less-risky trades like spreads instead of naked puts and calls.

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CHECKLIST - STEP 2

Selecting the Correct Option Strategy –  Since IV Rank is usually high before earnings announcements, you will sell options

premium using naked options, credit spreads or some other credit strategy. –  Determine your maximum loss and maximum gain before you enter into a position. Only

experienced traders should sell naked options since maximum loss can be unlimited and result in large portfolio drawdowns.

–  Use analytics to determine underlying stock price movement before and after earnings

announcement. Certain stocks will usually outperform analyst estimates and certain stocks will usually miss. Review seasonality and stock price forecast based on models.

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CHECKLIST - STEP 3

When to Close your Trade –  If you enter into a position 5 - 15 days prior to the earnings announcement and you are

making money, do not wait for earnings. Try to close your positions prior to earnings without taking on the risk of uncertainty due to a binary event.

–  Keep in mind the higher probability of success, the higher is risk you have to take in case

of an “outlier” event or price movements of the underlying stock exceeding the estimated move range determined by at-the-money option pricing.

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CHECKLIST - STEP 4

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