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Week of October 17, 2022

As earnings season ramps up in the coming week, I wanted to note a couple items.

October 19, 2022


As earnings season ramps up in the coming week, I wanted to note a couple items.

First, be careful buying far out-of-the-money options with little time until their expiration.

Could they work? Absolutely! That being said …

The odds aren’t great.

Essentially, the options market prices in the risks of a big downside and upside move on earnings, and thus options prices for calls and puts are expensive headed into earnings, and then these options get crushed following the report.

My point is, when getting involved with earnings plays, think of the money risked as play money, which could vanish in the blink of an eye if the stock doesn’t move in the direction you are hoping for.

Next up, pay attention to the full details when looking at my Daily Option Order Flow list. For example, these trades were made this morning:

Buyer of 20,000 Verizon (VZ) October 37.5 Calls for $0.52 – Stock at 37 (earnings 10/21)

Buyer of 30,000 Petrobras (PBR) November 17 Calls (exp. 11/4) for $0.27 – Stock at 14.5 (earnings 11/3)

As you can see, the VZ calls are a pure earnings play as the company will report Friday morning, and the PBR calls expire one day after the company reports earnings. (Please note, I don’t love either of the trades listed above, though of course earnings are the great unknown, and for all I know, both could work).

Stepping back, my watchlist for new positions is going to explode in the next three weeks as earnings stars will be hard to miss amidst the market carnage. And should conditions improve, our portfolio may look drastically different in the next month. With that in mind, be patient and be ready to put capital to work in new leaders.

Finally, if you want to read past articles I wrote regarding earnings, below are links to articles I wrote regarding, “The three day rule when buying earnings disasters,” “How to price the expected earnings move using options,” and the “Option pricing crush post-earnings” (skip to the AAPL Options Pricing section).

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.