This review is from: Trading on Corporate Earnings News: Profiting from Targeted, Short-Term Options Positions (Hardcover)

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Traders who want to cash in on the huge swings that growth stocks have after earnings are announced will find this book very informative and interesting. The authors show through statistics and empirical data how traders can make money in option plays that are held through a company’s earning announcement.

Half of the earnings announcements made by companies have market returns that are 30 times as large as a typical non-announcement day. These kind of moves make volatility driven option strategies successful many times. The research shows that companies that have surprised the market with better than expected earnings will continue to do so. The research also shows that it is very difficult to predict how the market will react to good or bad surprise earnings. Sometimes it sells the news even when it is good and sometimes it goes up on bad news, the complexity of the reports also come into play where revenue is not what the market wanted so it sales off even though the earnings beat expectations.

The book recommends buying options that are very close to at-the-money on both sides both a call and a put where the delta is near 1 in the closest month to expiration. This is an option straddle where you profit on a sharp move in the underlying stock regardless of which way it moves as long as it is a big move. This is where you want to be to get the maximum response to price movement with the option that occurs in the equity. This is a very short term strategy buying the day of the earnings announcement and only holding to the next day. This limits any deterioration in the option through losing the theta value through time. You want to sell the options on both sides the next day to lock in profits after the move before the stock retraces. Growth stocks often have the torpedo effect when they miss earnings and fall dramatically, this would be profitable for this straddle strategy.

However for this strategy to work you must buy options that trade enough contracts to have a tight bid and ask spread so you do not lose your profits going in and out of the trade of a stock with illiquid options. If the stock does not move fast enough after earnings to cover both premiums then you will sell the next day for a loss because of collapsing volatility value in Vega. However if the stock does move farther than the premiums of both the call and the put you will have a profit on the side that was hedged for that direction that will cover the loss of the other side of the straddle that will be almost worthless after the trend.

This strategy caps your down side risk but gives you the potential for unlimited profits theoretically in a strong trend after earnings.

One problem with this strategy is the efficiency of pricing in implied volatility. You must have that greater than expected move to be profitable. The book does a good job of showing option traders how to locate these specific types of trades. The winning trades on the right trades are in the high double digits on the capital used.

These trades are non-directional which increases your odds, you do not have to predict the direction of a big move you just need a big move. Great book for people learning about option strategies, great food for thought.

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