How is this possible? Many of you are probably thinking that I am trying to guess the earnings reaction or perhaps I am selling an options straddle into the number to capture a collapse in IV. That is not the case… at all. I never hold a position over a binary event. I have a much better method and it is pretty easy to learn.
Today is April 1, 2021 and earnings season is at our doorstep. I look for historical trends and I focus on stocks that have rallied into the earnings announcement more than 75% of the time during the last 12 quarters (3 years). I could go back farther than that, but I find my sample of greater than 10 to be statistically relevant and I want to stay fairly current. This seasonal trend provides a huge statistical edge, but I don’t stop there.
I use a search called Pre-Earnings Bull. All of the stocks in this list have a rallied into the earnings announcement once they are inside of the 2 week window and they have done so 9 times or more in the last 12 quarters. I want to sell out of the money bullish put spreads on these stocks to; distance myself from the action, take advantage of time decay and to take advantage of the seasonal trend in the stock as the earnings announcement approaches. The stock can move a touch lower, it can sit right where it is or it can move higher. I just do not want a big drop so I pick stocks with stable price action.
I sell weekly options that expire before the earnings announcement. Remember I do not hold over the number so I do not want to be forced to buy the spread back. In the Pre-Earnings Bull search below I am going to select an earnings release date that is more than 2 expirations away (April 19), but not more than 5 weeks away (May 3). I want to have some expiration dates to choose from, but I don’t want the range of the last date to be too far out because then I lose some of the seasonality that I am looking to capture. Furthermore, I want to sell near term options to take advantage of accelerated time decay. During earnings season I want these positions to expire and then I want to move on to the next one.
In the search below you will also see that I am looking for excellent options liquidity greater than -2 will suffice.
In the screen shot below you can see the candidates. I like to cast a wide net and then draw it in. I can select any of the variables in this search table to narrow the search or I can just click through the charts. Ultimately I am looking for a stable stock with strong technical support that has NOT shot higher. The technical support could be horizontal support, a trend line or a major moving average. Stocks that are moving higher pose more risk and that is why I avoid them for this strategy. Those stocks might already be on the move ahead of earnings and I do not want to risk a pullback. I need close technical support because that will provide my position with another level of protection and we know that buyers are interested at that price.
There were many good candidates in the list, but I will focus on a good chart and a bad one. First let’s look at one that does not fit my criteria. MMM has run to hard. That leaves it vulnerable to profit taking and perhaps it is already making its earnings move. The support levels are too far away and a bullish put spread at those levels would not yield a decent credit. I need a stock that has not run hard. Remember, statistically the stock can be dead flat and I can sell an ATM option knowing that the stock has a tendency to rally into earnings. Selling an at the money spread would yield a nice credit, but it would not give me much breathing room.
MGM was a stock that I liked in the search. It has horizontal support and it announces earnings on April 29th. The horizontal breakout after the last earnings report is represented by the “A” on the chart (A = reported after the close) and the stock rallied on the news. That price level of $37 is technical support. We can also see that the 50-day MA is at $36, providing us with additional support.
I want to sell the options below that technical support because I know that buyers are interested at that level. If the market falters, that support could be tested. So for this trade I will sell the MGM April (23) $36 puts and I will buy the April (23) $35 puts for a $.15 credit. There is $1.00 between the strike prices and that minus my credit is my margin requirement and my maximum risk ($1.00 – $.15 = $.85). If the spread expires worthless I will make $.15/.85 or 17.6% in 3 weeks. If the stock drifts below the strike price and it is just normal price movement, I will let it float in and out of the money with the expectation that as it gets closer to the earnings release the bid will grow. As long as the options have some time premium I do not have assignment risk. A close below the second support level in the chart would prompt me to close the trade. You will also notice that this options spread is 2 standard deviations (red dotted lines) from the current price which also increases my probability of success to 95%.
Successful trading requires an edge. In this instance I am taking advantage of a seasonal tendency and I am taking advantage of accelerated time premium decay. I am also taking advantage of the distance the stock would have to travel (2 standard deviations) for this trade to be in trouble and I am leaning on technical support that should attract buyers (horizontal support and the 50-day MA). The more checkboxes you mark, the higher your odds of success.
1. If you do not know how to sell bullish put spreads… do not sell bullish put spreads. This is a very consistent strategy and you should learn it. You can learn the strategy for free on the Options Industry Council’s (OIC) website.
2. Could I buy the stock or do a short term overnight swing trade with options as the earnings date draws closer – yes.
3. During the trade I want the market to remain stable. If the SPY starts breaking technical support I have to consider closing this trade and all other bullish trades. Never take your eye off of the market.
4. When you sell options premium make sure that the expiration date is before the earnings announcement date. The options will hold a lot of IV if they span earnings and this will decrease your profitability. If you are buying options make sure the options expiration spans earnings. You want that IV to hold up.
5. This article is for educational purposes only.
6. This scanner is found in Option Stalker. CLICK HERE FOR THE FREE 2 WEEK TRIAL