How to Trade Earnings Season with Options

Earnings season comes around every third month in the stock market.  As a trader you can expect a surge in volatility.

When new information surfaces about a company’s ability to generate revenue, the stock price will fluctuate to price that information in.

These stock market gyrations provide you an excellent trading opportunity.

Naturally, many traders want to find out how to trade earnings season?


How to Trade Earnings – Mistakes to Avoid

One of the most common mistakes traders make is the assumption that they have to guess where the stock price will go to make money.

This is false.

Professional traders do NOT speculate on the direction of a stock.

You are not actually looking to get into a position before the earnings report, because you do not know what the outcome will be.

If you do know, it’s illegal to trade on that information. That’s called insider trading.

You want to wait until the earnings report is released and the stock opens for trading the following day.

If you are trading options before earnings, you are overpaying for the trade and the probabilities are terrible.

I strongly advise you NOT to take a cheap long shot bet hoping to be right.  The probability in the long run you will be successful with this strategy is close to 0.

PRO TIP: One strategy that actually does work before earnings is selling options premium while it is inflated. But, we will skip this in today’s article.

What I want to show you is two simple and effective trading strategies on how to trade earnings.


How to Trade Earnings – The Open after Earnings

Earnings announcement are usually after the market closes on a weekday.

Feel free to read up on the revenue numbers, profits, margins and all the other data that comes out.

Enjoy the read, but it is pretty useless, because trading volume happens on emotion in the next few days after earnings.  The fundamentals do not really matter.  Logic is always over powered by emotion.

The following day after earnings, the stock will open at 9:30AM EST and you are set to trade using one of the two following strategies.

I strongly discourage traders from trading in the after-market (4:30 to 8PM) and pre-market (8AM to 9:29AM).  Volumes are weak, spreads are high and making a good risk-adjusted profit is very difficult.


How to Trade Earnings – Trading Strategy One : Fading the Move

First, I want to mention that this trading strategy is more risky for the inexperienced trader.  You are playing against the grain here and against initial momentum.

If you manage risk properly and stay disciplined, it can be an amazing short term trade opportunity.

Here is an example using the most recent Netflix earnings report on July 17th, 2017.

Netflix smashed the new subscribers expectations, but the expenses for new content were also astronomical.  Does this matter? No.

What matters is that the stock opened up over 8%, at $176.09 on July 18th, 2017 at 9:30AM.

Here is a five minute chart:


In the blue shaded area you can see the stock exploded higher on the opening price the following day.

You can see that 20 minutes after the open, or on the 4th candle there was very little sell side volume and it was decreasing.

Because the volume was light, you would not want to enter a fade trade.

If however volume started to intensify and increase from one candle to the other, the fade trade is a perfect opportunity.

You would set your buy stop loss above the day session high, or around $178.10.

In this example, fading did not work.

In other earnings events, you want to wait for the one or five minute chart to start to decelerate on the way up. Once the stock moves down on higher volume than the current bar you can buy put options.

The target for this trade is a 30% gain.

You can take partial profit here, or full profit. It is your decision, there is no right answer.  It varies case by case.

But with this strategy the goal is to take very quick profit and set a stop loss above the day session high.

The objective is to get in and out very quickly and take a profit, because you are shaving against the grain so to speak.

Remember, no one has ever gone broke taking profits.


How to Trade Earnings – Trading Strategy Two : Buying the Retrace

The second trade type has higher probability of success as it is in favor of the momentum.

In this trade, you want to wait for the first few minutes of the open.

Watch the one minute and five minute charts very carefully.

In the 5 minute Netflix chart below, you can see that the open happened on heavy selling volume.

You want to wait for at least another 2 or 3 candles (10 to 15 minutes) to see the initial burst calm down.

Between 9:40 and 9:55AM Netflix moved lower, but the volume was consistently weaker.

This occurrence tells you that the selling is some brief profit taking and the big money is waiting to swoop in and start buying.

Wait for it.  Be patient.


Here is the 5 minute chart of Netflix:


What happened at 10AM?

The five minute candle closed bullish with increasing volume.

Institutional money is starting to move in and buy the retrace. Now it’s your turn to jump on board as well.

Buy Netflix call options and get long!

The stop loss can be set to a new daily low, or below $174 at this point.  Considering the current price is $178.25, that is not a big risk.

However, it comes with a huge potential reward.

But how did this trade do?

Here is another chart showing you the follow through for the day:


The green box is the original entry, and the red box is the original protective stop.

At this point you would have a massive profit on your call option position.

You will definitely want to move the stop loss higher at this time, to reduce your downside risk.

A great level would be below the $182 support level. Somewhere between $181 to $179.

Another option is to sell 50% of your position and take a profit, then set the stop for the other half.  This is a favorite exit approach of a professional trader.


How to Trade Earnings – To Fade or to Buy the Retrace?

Neither strategy is the best, or better than the other.

In fact, in some situations you can actually start by fading the initial move and close profits on it then switch to the trend side.

Everything depends on how the session opens up and what opportunity comes first.

But if you watch volume on the initial open the market will tell you what the best trade is.

In general, if the open makes a big initial move on weak volume, a fade opportunity is present.

If the open makes a big initial move on heavy volume, wait for a minor sell off and get in on the trend.


How to Trade Earnings – Conclusion

Everyone wants to know how to trade earnings. How to take advantage of the most volatile times in a stock company’s price.

I would strongly suggest you try this strategy in a demo account on a few names.

In the next few weeks, you will have a slew of earnings to practice on.

Then you will be ready for the next quarter, because remember these earnings opportunities come up every three months.

Do not force anything. Be patient and disciplined.

But also be obsessed with managing risk and take profit while you can, don’t get greedy and wait for more because most often you end up losing what you have right now.

We hope you enjoyed this article.

I would love to hear about your success, keep me posted.

Good luck and good trading.


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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.