The Hunt for Profitable Options Trades During Earnings Season
Earnings season has arrived, and like clockwork, market giants such as Citigroup (C), JP Morgan Chase (JPM), Delta Airlines (DAL), Wells Fargo (WFC), and Blackrock (BLK) have already unveiled their financial reports.
This week’s lineup includes Bank of America (BAC), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), and Netflix (NFLX) – titans whose earnings disclosures are awaited with bated breath.
Today’s discussion centers on leveraging Barchart’s Screener tool to unearth promising options trade concepts amidst this earnings hullabaloo.
Exploring the Stock Screener for Golden Opportunities
The initial move involves navigating through the Stock Screener to identify firms with robust option volume and looming earnings dates. Here’s a winning formula you should consider:
- Total Call Volume greater than 2,000
- Market Cap greater than 40 billion
- Latest Earnings Date Between April 16 – 19
This methodology pinpoints corporations scheduled to announce earnings this week, boasting substantial option volume. Opting for stocks with strong option volume is critical – streamlined trade execution and tighter bid-ask spreads are par for the course.
The outcomes of the screener exercise are as follows:
Now, it’s time to cherry-pick the desired companies for trading and delineate a suitable strategy. Let’s delve into a couple of illustrations.
Flying High with UNH Iron Condor
An iron condor is a gambit structured to capitalize on decreased implied volatility, anticipating the stock to hover within a projected range.
Heightened implied volatility translates to a broader expected range. The crux of an iron condor’s profit is capped at the premium acquired, with maximum probable loss equally constrained. The maximum loss delineation is the variance between the long and short options’ strike prices, minus the premium.
For instance, a foray into UNH – envision selling the $415 put and acquiring the $410 put, expiring on April 19, yielding roughly $0.60 yesterday. Subsequently, instigating the bear call spread involves vending the $475 call and purchasing the $480 call – fetching around $0.70 yesterday.
The aggregate harvest from the iron condor sums up to approximately $1.30 per contract or $130 premium.
The profit corridor spans from $413.70 to $476.30, calculated by adjusting the short strikes with the premium.
Given a $5 spread for both, the maximum exposure equals 5 – 1.30 x 100 = $370, rendering a potential 35% return.
Earnings-swirled trades impose a tight adjustment window, priming for mixed outcomes. UNH has gravitated within the anticipated band post three of the last six earnings revelations – though historical data isn’t a future propitiousness oracle.
Traders can dabble in the Bull Put Spread Screener for bullish perspectives or the Bear Call Spread Screener for a bearish stance.
Netflix’s Diagonal Put Spread Drama
Contemplating NFLX, ponder selling an April 19 $545 put intertwined with acquiring a May 3 $535 put.
The $5.00 from selling the April 19 put and the $6.30 for procuring the May 3 put culminate in a net debit of $130 – the apex risk on the upward trajectory.
Conversely, the downside harbors a looming maximum loss of $1,130, computed by enriching the spread difference (10) by 100 and adding the premium dispensed (130).
The zenith potential windfall nears $1,800, achievable when NFLX culminates precisely at $545 on April 19.
With a comfortable profit zone spanning $505 to $650, aiming for a modest 10-15% return is judicious, backed by an analogous stop-loss.
A turbulent NFLX descent at the onset threatens the worst-case scenario, warranting prompt trade closure upon breaching $545 imminently to curtail losses.
Embarking with a delta of -1 implies the initial position is delta-balanced, albeit this metric can sway significantly as the stock inches towards motion.
Proximity to $545 signals a potential closure of the trade pre-earnings revelation as a practical maneuver.
Opting for earnings-centered options trades is a venture rife with risk, unsuitable for neophytes. Short-term earnings-infused trades are non-adjustable – either a triumph or debacle, ergo prudent position sizing is paramount. Novice traders should steer clear of short strangles, harboring naked risks.
Furthermore, short-term trades carry assignment perils, a reality prudent traders should acknowledge.
Kindly recollect – options harbor risk, a prospect of losing the entire investment. This article serves as an educational guide, not a trade directive. Always conduct due diligence and consult your financial advisor before plunging into investment decisions.