SCT Podcast - Episode 34

SCT Podcast

Sarah: Hi everybody this is Sarah Potter from she can trade. And this is SCT podcast. We are at episode 34. Today's discussion is going to be focused around earnings and specifically how do you adjust and trade sorry how do you adjust and focus on your trades through that earning season. Obviously we'll talk a little bit about actually placing trades for earnings as a result of those. But also what do you do with all your other trades what to expect in the market when we have to go through an earnings season. So I have T.J. here.

T.J: Hello!

Sarah: And we're going to discuss this together. I think it'll be interesting also to hear our various perspectives on these kinds of things. So let's start off with a little kind of a definition of a basically an idea of what is earnings and how do you basically think the market moves through earnings season versus when we're not in earnings.

T.J: All right. So earnings we're talking about corporate earnings so every quarter financials companies release their financials and there's a lot of anticipation and a lot of excitement around the numbers or are sales up or sales down. Our earnings up earnings down how’s the company doing and obviously how does that link the stock price. Well, if you're a fundamental investor obviously the more the company's earnings and the better their financial ratios the higher the stock price. So people look for those numbers they look. They read through them they look for a lot of details to see whether the stock price is accurate. If it's a fair representation of where the stock should be trading and if not obviously do they think the stock price should be higher or lower? And the reason we need to watch for earnings is because it's a high volatility event. It's a pretty binary event. So the day before the earnings are announced or the day of there's excitement earnings are announced and as soon as the numbers come out you generally see a decent a big move in the in the stock's price either up or down. So what we need to do is options traders are we need to look for two things coming into earnings. One is we need to look for increased volatility. So we will see on our options chain that the week of earnings and especially coming into the day of earnings the implied volatility of that stock will increase. The other thing we need to watch out for is obviously if we're holding options positions through earnings so if we have put or a call or a spread or any trade that expires after the earnings date that that earnings date can significantly influence the price of the stock. And we just need to be aware of of those potential kind of potential influences when we go through earnings. So Sarah are there any websites or how do you find out, what do you look for where do you look to see when companies are going to have earnings.

Sarah: Yes, so I'm going to SCT up my trades differently through the earnings season than I will other times. And I do think that it's very important to always be paying attention to looking for when those earnings announcements are going to be because it's really going to change the flavor of how that stock is moving. So you guys know when we're trading in the trading room you'll often see us looking at the history of price how it's moving in relation to the broad market and those are really ways that we can identify opportunities to trade. But when we have earnings and earnings season that that announcement is going to change things. It's gonna do it also leading up to it. So you'll notice that I will still trade stocks a couple weeks before their earnings but we're gonna have to deal with higher implied volatility and if I'm buying a collar put I'm gonna have to deal with paying more than what I usually would in anticipation of that. And now a lot of times I can trade really well earnings actually before their earnings announcements so there's some good trades there when we look at how that stock has been behaving moving up to his announcement. We might have an expiry after the earnings but we can definitely take an opportunity to take advantage of a move prior to earnings. So generally stocks especially the more and more there in the media will have a nice move prior to its earnings announcement so we could definitely capitalize on that. So I mean it's tough to find them though right it's not about just okay well it's the next quarter. So all the stocks are gonna be moving because they have earnings announcements, there's going to be times when those stocks actually don't move they're gonna have less of a reaction than what market makers had anticipated would be in that option. And so that's also something to be paying attention to but when we're first looking for trades you can look at something like Yahoo Finance or a market watch or I think actually even some trading brokerage platforms have earnings announcements in them if I am correct on that. Did that do they have earnings announcements right in the platform?

T.J: A lot of platforms do. Definitely they do have the earnings dates. Obviously the other one too is nasdaq.com. They list the earnings dates you do have to generally current earnings date. If I'm going to be trading the earnings and I really need to make sure that it is that exact date whether it's before the market or after the close. I generally check two different sources because you'll find out as well if you look comb through earnings dates that different websites list may have a day earlier a couple days later. It may not always be that accurate. So I do like to double check there the one thing I do like about earnings I guess we can real really get into some strategies is what happens at earnings? There's two things there's the actual result of what happens and there's a move based on the result of what happens but there's also a move based on the expectations and that's how most stocks move. So if Nike moves up say they've got 75 cents per share of earnings and Nike so if the expectation was only 50 then that look great stocks gonna move up. If expectations were say 85 or 90 cents then the stock could move down as well so we can't look at just the absolute number. It has to be we have to look at expectations we have to look at was it sales was it revenue how do those compare?

And I think that's really what makes kind of earnings such an exciting time because there's so many variables involved. So with so many variables, so many inputs, so many unknowns what are some strategies that we can look at to give us kind of a shot at the best outcome because obviously saying hey I think let me guess I think the stocks gonna go up after earnings that's really a 50-50 trade at best guessing in the direction and we'll probably most likely guess in the wrong direction. So what can we do obviously out of the money credit spreads those are that's a great way to trade earnings you can limit your downside on that by keeping this spread nice and tight so maybe you don't want to do a five or ten dollar spread maybe you want to do a dollar or 250 wide spread. Keep your risk reasonable look for something out of the money as standard and a hat 1.5 standard deviation away staying wait far away from where the expected move is on that earnings announcement. Same thing with iron condors those work really well as well you can also just I mean you can also sell straddles. You can sell a strangle they work out really well again you're playing to the fact that the market thinks there's gonna be a bigger move and then really what's priced in and that's usually what happens. The trouble is they're unlimited loss. So we do have to be careful with that and if we are trading strategies where there is no stop-loss on them or where there is no limitation on what you can lose, we do need to be very careful because nine times out of 10 you're fine but those one or two trades where the earnings is two or three times the expected move. You might see yourself in a loss situation but I do think that there is a lot of opportunity out there to trade earnings. We just have to come at it with kind of a from a standpoint of this is these are some fun extra trades that we're doing. This isn't bread and butter meat and potatoes this isn't how I generate my reliable weekly income.

Sarah: Yeah, I wanted to mention that so when you're trading earnings I think the biggest tip is that you don't want to expect that all of your earnings trades are going to work and I think you need to kind of account for that. So when you're SCTting up trade strategies through earnings let's say you're placing one earnings trade a week through the earnings season that if you look at the collective of all of those at the end you can't have a goal of making eighty percent of those work. Because they won't because those trades at the end of the day are really more 50-50 trades. So as long as you're realistic about that and if you test the strategy over different quarters through the year and let's say you're coming out ahead sixty-five percent of your trades are right through earnings then that is a time that that you want to be adding all more contracts but you certainly want to test that through more than one quarter. So trading earnings is fun because yes it's pretty hyped up everyone talks about it. There's all this great opportunity, absolutely but remember many people don't talk they're losing trades. They only talk about their winning trades and it's with earnings you're gonna have winners and losers to betting regardless of what strategy you pick. But you can still make it work as long as you're very aware of what your percentage is as you move through each earning season. And so perhaps a goal closer to about 65% so you're getting more winners than losers so that overall you're still coming out with profit is important you don't want to just put trades on. And just pay commissions or come out at zero no your opportunity cost is important as well you've spent time looking for those trades and that's really relevant as well.

T.J: Yeah, exactly and I think that is I think that's the key to trading is everybody tries to do the same thing. And I think if you have to find something that works for how you feel comfortable trading and if earnings is a strategy that you can make money at that's fantastic I mean that that's great that's what you need to be focusing on. For somebody else doing the exact same trades they might not look at it the same way or be able to enter or exit at the same time and they may not, they may do the same trades but not but end up losing money on that series of trades. So it's really something that's very personalized and if you can make it work fantastic you just need to realize that with earnings there is a ton of anticipated and unanticipated things that are happening. And it makes it really exciting and there's that potential to make to make some really quick money. As you make that money you place the trade five minutes before earnings are released at five minutes after four and it's usually either max loss or max profit. There's usually not a lot of difference in between and if that's how you like to trade. Then yeah, what earnings is something that you can dip your toe into.

Sarah: Yeah, I think that's a good point let's end on that so we're moving into earnings season now so there's lots of opportunity and I think TJ's got some good examples here on how to kind of keep that risk a little tighter and I do like the idea of still trading but trading out of the money. And keeping that spread a little tighter so that if you some of those trades work great, if they don't that's fine. You're not blowing up any accounts. So look forward to you guys remember we do have our live trading room which is the opportunity for you to see both of us trade live all the time showing our real accounts real, trades, real money. Look forward to seeing you there and happy trading everybody.