We are officially in the doldrums between earnings seasons. But an opportunity or two can still be found each week. And while the offseason earnings trades oftentimes lack all of the necessities for an actual trade, it’s still worth taking a look at potential trades as we patiently wait for another upcoming earnings season, if only for educational purposes.
Nike (NKE) is, in my opinion, the only stock worthy of a look next week. It’s due to announce after the close Monday. And by the looks of its historically high IV rank (99.60), now is as good a time as ever to sell some premium in the stock.
*I plan on taking a closer look at a potential NKE trade, including all of the statistics (IV rank, IV %, etc.), in a follow-up post. Stay tuned!
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As I say each week, taking the conservative approach continues to be consistent and profitable. Those that aim for premium first by choosing stocks with higher IV will hit the occasional winner but will ultimately fail over the long term. Remember, it’s all about allowing the law of large numbers to work for you.
Risk management is the key to successfully trade earnings. Get in, get out, move on. In almost every case, adjusting is a frivolous task and only leads to additional losses. Allow the law of large numbers to work in your favor by simply keeping your position size at reasonable levels (1% to 5%), which allows you to endure bouts of sequence risk. Moreover, understand that more trades do not equate to more profits. Be patient. Allow the opportunities to present themselves, then take action by applying an options selling strategy that allows you to have a high probability of success. Understand that you might only have 1-3 real opportunities each week.
Here are a few other top earnings options plays for next week (3/21 to 3/25):
Courtesy of Slope of Hope
Due to the uncertainty around earnings announcements, both speculators and hedgers create a huge demand for options around a company’s earnings announcement. This increase in demand for the options for that stock increases the implied volatility, which ultimately increases the price of the options.
Basically, options prices are inflated around earnings announcements, and as sellers of options our goal is to take advantage of these price discrepancies.
We can always create a trade with a nice probability of success using a variety of options selling strategies. At the top of the food chain would be the undefined risk options strategy known as the short strangle. Of course, if you wish to use a risk-defined trade, check out the price of an iron condor at various strike widths. I normally use short strangles or iron condors outside of the expected move and with a probability of success typically above 80%.
The reason I go outside of the expected move or range is because we know through extensive research that 80% of stocks trade within their expected move immediately following earnings.
Again, if you have any questions, please feel free to email me or post your question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.