Earnings Season Options Strategy for Steady Profit

Earnings Season Options Strategy

Just like expiry day trading in options, options trading during the earnings season also has special significance. The quarterly earnings picture is coming out fast. Infosys declared the quarterly result on the 14th of July. morning. This article will explain the earnings season options strategy and which of the strategies should we use – straddle or strangle before earnings. Let’s get a little deeper before practically showing their uses.

Creating Strangle or Straddle Before the Earnings Season Starts

Earnings season brings a lot of interest among investors. They take positions in both directions creating a spread. Earnings season options strategy for options traders is created from their buying interest. They buy CE (Calls) and PE (Puts). Sudden buying interest in options increases their price and IV (Implied Volatility). Thus, for options traders, the inflated options price brings trading opportunities.

What is Straddle?

When one takes a position in both CE and PE of the same strike price, a straddle is formed. For example, buying Nifty 9000 CE and PE of July,17 is buying Nifty July 9000 straddle. We can similarly sell straddle also.

What is Strangle?

When one takes positions at OTM (out of the money) strikes, equidistant from the price of the underlying, a strangle is made. Say, Nifty is near 9000. Selling Nifty July 10000 CE and 9800 PE is selling the strangle. Similarly, one can buy strangle also.

  • We buy straddle when there is high volatility and profit can be realized in a very short time. Otherwise, time decay will eat up profit.
  • We sell strangle when there is high volatility and we want to trade volatility by selling options, knowing that soon IV will come down and we will realize the profit from both CE and PE.

Let us find some practical examples to find which is the better earning season option strategy.

Example of Earnings Season Options Strategy

Infosys declared its quarterly result on the 14th of July. Let us discuss different cases checking its options chain analysis.

Earnings Season Options Analysis

Case 1 – Straddle Before Earnings

Infy July Future was around Rs 980. Say we buy ATM straddle of Infy on 13th July, i.e. 980 CE @ Rs 28 + 980 PE @ Rs 30 or Rs 58 is the combined price. On the 14th of July, when the result was declared, even if we could square off our position early, we could have squared off our position at a high price of Rs 50 (maximum 37 + 22.85 = 59.85) creating a loss of Rs 8. Waiting for more could have resulted in a higher loss.

INFY Long Straddle Payoff Graph
INFY Long Straddle Payoff Graph

Case 2 – Strangle before earning

As already explained, before the declaration of result options prices get inflated and we can sell volatility by selling the inflated CE and PE. Say we take a Strangle of Infy on 13 July. We sell 920 PE @Rs 8 and sell 1040 CE @Rs 8.5 (total cash inflow Rs 16.5). On the 14th., after the result came out we square off our positions.  We buy 920 PE @ Rs 2 and buy 1040 CE @ Rs. 3 (total outflow is Rs 5). Hence we net Rs (16.5-5) or Rs 11.5 per lot. Thus selling strangle is more successful.

INFY Short Strangle Payoff Graph
INFY Short Strangle Payoff Graph

FAQs on Earnings Season Options Strategy

What is the best options strategy during earnings?

The best option strategy for trading during earnings season would depend on your outlook for the stock and volatility. For example, bullish investors may benefit from buying calls or writing covered calls, while bearish traders can utilize strategies such as selling puts or writing naked puts to take advantage of increased volatility.

When should I buy options for earnings?

In general, you should buy options prior to an expected move in a particular security ahead of its financial report. This allows you to access the potential gains offered by volatile markets but also minimizes downside risk if it turns out that there’s less-than-expected movement following the news release.

What is the safest options income strategy?

One of the safest income strategies when trading stocks around earnings season is writing covered calls – this involves purchasing shares of a company’s stock as per derivative lot size and then selling one call option contract at a strike price above current market value in order to generate passive income while minimizing trade exposure & potential losses significantly.

How do you trade stocks during earnings season?

Trading stocks during their reported quarterly earning results can be difficult due to both high levels of uncertainty & heightened volatility. To minimize risk yet still capitalize on possible profit opportunities you need thorough research and proper capital management techniques. Also, combining these with trend analysis (technical/fundamental-level data), along with understanding fundamental information regarding estimates published ahead of time by different sources improve the odds of success even further.

Conclusion

As part of the earnings season options strategy, we have discussed two strategies, straddle before earnings and strangle before earnings. Selling Strangle gives better results. To adopt this strategy, we need to keep an eye on the following factors.

  • Take position before the result day.
  • Chose a stock with a moderate level of volatility.
  • Choose strike price wisely (take +/-1sd and when IVP/ IVR is near 100).
  • Sell OTM PE and CE simultaneously (the legs should be equidistant from the ATM strike).
  • Square off positions after results come out, chose a favourable exit point, and square off positions simultaneously. Too much waiting may deflate profit.

However, options trading is a risky business. Hence we suggest you consult a financial planner before implementing a strategy.

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Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.

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