Earnings season and options trading go together like Amazon.com (NASDAQ: AMZN) and Whole Foods. Or Microsoft Corporation (NASDAQ: MSFT) and LinkedIn. Or Gilead Sciences, Inc. (NASDAQ: GILD) and Kite Pharma. You get the idea.
The binary nature of an earnings event—either Wall Street likes the numbers or it doesn’t—makes this six-week period a great time to use options strategies.
“Earnings season creates a lot of volatility, which to me is an opportunity,” according to Marc Chaikin, founder of Chaikin Analytics. “I think the volatility creates opportunities. There’s an awful lot of speculation in the media about whether a company is going to beat estimates or disappoint.”
A 40-year veteran of Wall Street, Chaikin is a big proponent of using options to play stocks around their earnings reports.
“This is what we’re preaching at Chaikin,” he said. “The discipline of fundamentals and technicals combined with the signals, use options as a low-risk way during earnings season to get outsized returns when you’re right, or lose a predetermined amount of money when you’re wrong.”
Here are two basic ways Chaikin uses options to play earnings season.
Buying Calls And Buying Put Spreads
At its simplest, these are basic ways to play an earnings announcement without risking a lot of capital. Buying puts is a simple way to bet on downside, while buying calls is a simple way to bet on upside.
“There’s some opportunities in earnings season on both bullish and bearish stocks,” he said on Thursday’s PreMarket Prep. “On bearish stocks, there’s the opportunity to buy an inexpensive put spread, and if you get a negative earnings surprise you’ll make a lot of money very quickly.” He noted Seagate Technology PLC (NASDAQ: STX) was an example of this last quarter.
On the bullish side, Chaikin also noted a phenomenon he's observed where stocks in a downtrend will rally into the earnings report.
"It’s an odd phenomena. You can call it a little bit of short covering and a lot of wishful thinking, that usually a great opportunity if you want to take a pre-defined risk in a put trade—either an outright put purchase, or we prefer vertical put spreads—because you’re getting the benefit of a contra move into some event that you think is going to reverse the stock.
“If you get an opportunity to buy into a stock that’s sort of selling off into the earnings report with a pattern of positive earnings surprises—and that was the case with Micron Technology, Inc. (NASDAQ: MU) by the way back three or four weeks ago—good opportunity to establish a long position, you’re less likely to get a huge pop on the upside in the options.”
To learn more about trading options around earnings season, register for Marc Chaikin’s webinar Thursday, October 12, at 4:15 p.m. ET: Spot The Best Stocks: Marc Chaikin’s Blueprint for Option & Swing Trading. He’ll be joined by Larry McMillan, the founder of OptionStrategist.com.
You can listen to Marc Chaikin's full interview on Thursday's PreMarket Prep at 14:23 in the clip below.
Chaikin Analytics is an editorial partner of Benzinga.
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