Earnings season can provide ample profit opportunities, but using the wrong trading strategy can just as easily spell disaster.
For most traders seeking to profit during earnings season, there are two basic schools of thought:
- Take advantage of potentially higher implied volatility
- Take advantage of a price move without getting hurt by implied volatility.
- Implied volatility often spikes before earnings announcements, generally causing calls and puts to increase in value. However, those increases could be partially or completely offset by large price moves in the underlying stock.
- Implied volatility declines after earnings announcements, generally causing calls and puts to decrease sharply in value. However, those decreases could be partially or completely offset by large price moves in the underlying stock.
- Strategies that may benefit from an increase in implied volatility include: long straddle / strangles, ITM vertical credit spreads, short butterflies, short condors, ratio back-spreads.
- Strategies that may benefit from a decrease in implied volatility include: short straddle / strangles, ITM (in-the-money) vertical debit spreads, long butterflies, long condors, ratio spreads.
Using OptionStack, you can easily backtest various earnings strategies, including trading straddles, vertical spreads, calendars, condors, etc..