Earning options strategies. TRADING DOCUMENTATION


Directional Earnings Options Strategy #1: Buying a Call

Long calls fix the price where a stock can be purchased. They typically gain value when shares rally.

By Justin Kuepper Updated Apr 3, The famous physicist Niels Bohr once said that "prediction is very difficult, especially about the future. Oftentimes, these tools are derivative financial instruments that can help provide an aggregate picture of future market sentiment - tools like options.

Long puts are just the opposite, fixing the level where investors can sell a stock. They usually gain value when prices decline.

Email Email When a company releases earnings, they provide the most recent financial performance and also give a guidance for the next quarter's performance. A company's earnings can be a very volatile and profitable time if you use the right options strategy. Unfortunately, most traders are taught to use the wrong option strategy and end up blowing out their account.

Long Calls Can Replace Stock One way traders can use options is simply buying calls instead of shares. You might worry about a disappointing earnings report or bearish analyst notes before the announcement next Thursday, July Netflix NFLX options chain, highlighting contracts mentioned in this post. However, it would behave like 46 shares because the options delta is 0. This approach could profit if NFLX keeps climbing into the report but lose money if the shares decline.

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Time decay is another risk because options usually lose value after big events like earnings. Vertical Call Spreads Can Limit Cost Traders wanting to hold their position through the report may want to consider vertical call spreads.

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Say you think NFLX will jump after its earnings report, rather than climb beforehand. That could be a percent gain from the stock moving less than 4 percent.

Vertical spreads may seem complicated because they involve more than one contract.

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There are two possible cases. An investor earning options strategies own NFLX shares.

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He or she could be bullish on the stock and hope it will rally on earnings. But they still want to guard against a selloff. A vertical spread with puts can be an inexpensive way to hedge downside risk while still having upside exposure. Alternately, a speculator may believe NFLX is overvalued after surging 73 percent from its March low.

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They could also use a bearish put spread to position for a earning options strategies. This can be safer than short selling the stock, which has infinite risk.

3 Earnings Option Strategies

Covered Calls Help Manage Risk Covered calls are the last options trading strategy covered in this article about risk management during earnings season. This requires you own at least shares of the company in question.

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The social-media company is scheduled to announce results after the closing bell on Tuesday, July Covered calls let you isolate the time value in the options and profit from it. This can also provide a hedge because the extra money collected by selling the calls can offset a drop in the share price. Pros and Cons of Auto trend lines Calls There are two risks to covered calls.

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That can expose you to declines in the share price. Second, profits to the upside are capped.