How many times have you thought to yourself that a BIG stock move is coming and the earnings announcement is going to be the price catalyst?
What if I told you there was a simple low-cost strategy with a twist that can position you for both a breakout or breakdown move with limited risk. Believe me… it’s real and I use it everyday.
Part I: Before the earning announcement
Earnings Straddle Trick
An earnings announcement surprise can trigger a large directional stock breakout either up or down. The Options Straddle Strategy of buying both a Call and a Put in advance of the data release positions you to profit in the event of a significant price move.
Buying the near-term options straddle is pricing in event risk with higher volatility and therefore, a higher relative cost in the options.
The twist is to buy more time until expiration, minimum of 60 days, than is needed for the specific event so that the exit of the losing side can salvage decent premium. Then the option in the breakout direction can be managed to maximize the follow through price trend.
Part II: After the announcement and the market has moved
After Earnings Breakout – Drop the loser and ride the winner…
If the numbers are a non-event, close out the whole play with a minimal loss of time value because you only had the position for a week and more than 60 days until expiration means the options still have solid value. The time decay will be minimal for the deferred option months in comparison the front month gamble for all or nothing winnings. Typically, options become more expensive as the earnings release approaches as buyers get more fearful of a surprise. To avoid much of the increase in volatility enter into the Straddle at least a week prior.
Important Rules
Rule One: Play both sides with At The Money options. The total cost of the Straddle (Call and Put) need to be less than 10% of the value of the stock. Remember… The more expensive the play in relative terms compared to the stock the larger move required to be profitable.
Rule Two: Buy more time until expiration than you may need — at least two or three months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
After earnings, exit the option opposite the breakout move and manage the trend with the winner.
The expiration option trade breakeven is the strike plus and minus the option premium total.
These break-even thresholds should be less than 10% above and below the current share price with earnings data a possible catalyst for a multi-month breakout trend.
If nothing BIG happens in the stock sell your straddle to close out and only lose a bit of time value since the options still have months until expiration.
