Sa's Options Lessons: Part 3: Earnings Trades

In this series, I would like to focus on the best strategies for playing earnings. My goal is to provide you with safe strategies so risk management is essential.

Risk Management: Don't risk more than 1% of your capital on each earnings trade. Initially even paper trade these till you become confident.
Expected Move (EM) vs Actual Move (AM): If you add the ATM call and put prices, it gives you the expected move. For earnings calculating the expected move tells us how much the stock can move either side post earnings. But for earnings usually the actual moves are lower than the expected moves which is what we want to take advantage of
Stock Selection: You can goto a paid website like market chameleon or any others where they list the stocks EM vs AM history. Use this data to pick the stocks where historically the AM stayed under EM 70% of the time or higher. Pick stocks with good liquidity and enough history.
Strategy 1: On the day of earnings (15 min before market close), Sell a ATM call and ATM put and buy far OTM (say 5 delta) call and put. Close this 10-15 mins after market opens next day
Strategy 2: A much safer strategy. Sell call and put at 2 times EM. Say the EM says stock will move by 5%, then sell a call and put at 10% OTM. Then buy even farther out call and put. This will create a very safe Iron Condor. Close this 10-15 mins after market opens next day
Strategy 3: Safest strategy. See the stock's historical maximum single day drop percent and max single day increase %. Use these and sell call and put beyond these percent drops. Then buy even farther out call and put. This will create the safest Iron Condor. Close this 10-15 mins after market opens next day

Feel free to ask me if you have any questions.

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