Tom’s Weekly Newsletter February 1, 2023

Originally published via our newsletter previously. Subscribe for early access!

Earnings Season is and has been Under Way

We are at the front end of earnings season.

While one researches, scans, and analyzes securities for an option trade, bullish or bearish, the thing to know (and for those of you who have traded options over earnings periods before should remember) is that earnings announcements can make or break an options trade.

If one has a bullish option trade on going in to an earnings announcement the reported numbers can send the underlying security in the opposite direction the security needs to go and any profits in the trade can get wiped out and losses ensue.

There are times where one can have an options trade on and the earnings for the underlying security is better than expected and it can send that option trade in to a very prosperous situation.

The risks are too great we feel and even if you have an earnings announcement help a trade of yours, it only takes a couple of trades getting wiped out due to earnings that one realizes that is not a fun situation and then adopts this philosophy…

… Win, lose or draw consider closing the option trade prior to the announcement; unless they go through training on an earnings strategy and works that process.

Corners of the Market

SPY – SPDR S&P 500 

The longer-term view on SPY is that it has formed a wedge over this past 120-trading days.

Should S{Y break out an expected price move higher could be anticipated to go the distance equal to the widest width of the wedge higher, from the price point of the breakout.

Another smaller move initially may just be to the previous resistance price of 410.

Another indication price could go higher on SPY is the Simple Moving Averages (SMA).

The 10-30 SMA has the shorter-term (10-day) crossed above the longer-term (30-day) 4 or 5 trading days ago.  Bullish momentum.

TLT – iShares 20+ Year Treasury Bond ETF

Darknet is one of many scanning tools I have available in my online software.

The B signal is considered a Bullish signal making me anticipate a move higher in price.  That indeed happened off the latest B signal.

The S signal doesn’t mean Sell or get bearish.  It means the run up may be Stopping or Stalling.

It may reverse from there or just consolidate and trade higher still.

The latest move from the B to the S signal was good for 8-points.

If it inches higher price resistance is still at or near 110.

A bullish cross in the 10-30 SMA’s happened a bit ago, but if that S signal plays out it may indicate softening for TLT and that could mean more upside for equities.

UUP – Invesco DB US Dollar Index Bullish Fund

The US Dollar as represented by the ETF UUP is clearly still in a down trend.

I have  a horizontal support line drawn in and that was broken in December and again in January.

There is no bullish cross in the Simple Moving Averages, so I gather the trend isn’t in jeopardy of reversing.

Remember, we don’t trade options on UUP as the price moves just aren’t robust enough nor do they happened fast enough to make it worth the time, (you can see the increments in the grid lines are only $0.50).

UUP and SPY tend to trade inverse of each other so if UUP looks bearish it could be equities are bullish.

USO – United States Oil Fund, LP

Another Japanese Candlestick formation.  This one is called a Falling Three Methods pattern.

This is a bearish continuation pattern.  The pattern sees a Bearish reversal day (in this case the bearish day was part of the Bearish Engulfing pattern I highlighted last week.

This was followed by three days that traded a bit higher over three days, but the three days bodies were contained within the body of the first bearish day in the pattern.  What then tends to happen is the security continues in a bearish manner.

The last two trading days have seen USO trade lower or stall so we will see how this plays out.

GLD – SPDR Gold Shares

Tools and Observations

Trading options on securities during earnings is more difficult than one would expect having not received any education on trading strategies on how to do so.

An earnings announcement can come out and the company beats their earnings.  That would seem like a good thing and one might expect the price of the security to go much higher.  But, because they announce the future quarters may fall short of earnings expectations the security may instead drop a large amount and that could kill any profits that may have been had on the security or options one was trading on it before the announcement.

The flip side of that is a stock can announce an earnings miss and though that seems a bearish move may happen as a result of that, they could then state future quarters will bear or exceed or they announce a share buyback plan and if one had a bearish position on the security or options on it that could crush that trade.

I have seen many times a security announces a more bearish earnings number and the stock pops higher and I’ve seen a more bullish earnings number and the stock drops.

It makes no sense at times and can drive options traders insane trying to master options trading around earnings.

One of my instructors, Mike Wade has an Earnings Mastery In encourage everyone to pursue when we run that live, online course later this year.

STRADDLE / STRANGLE

What I want to do here with you all is give you one observation when considering options trading around earnings that you can do with an options chain.

Two strategies one can consider is a Straddle or a Strangle.

Because trying to pick which direction the security will go on their earnings announcement the straddle or strangle is perceived the more appropriate strategy.

The premise is you don’t have to pick a direction the security will move; you really don’t care just so long as the security MOVES.

And from what I will show you want it to move a price amount larger than the amount of the cost of the option trade.

Lets say a security you are interested in is going to announce earnings tomorrow.  In fact, here’s one that is going to announce tomorrow.

Intel Corp. (NASDAQ: INTC)

They announce earnings tomorrow, AMC – After Market Close

Instead of trying to pick which way the stock will go and then try and trade a call or put option alone based on that prognosis, one can buy to open one of each on the same order ticket.

One of each with the same expiration date and strike price is a Straddle (and one of each with the same expiry but different strikes is a strangle).

This education is not to teach which one to do, but to give insight as to getting an idea on HOW MUCH the stock may go at the time of announcement.

Take the At the Money (ATM) strike price options cost / price for the Call and the Put (for a Straddle) and add them together.

That could be deemed the amount the options market makers are giving as a gauge for the amount they expect the stock to move when they announce.

The calls for February 17 expiration at the 29.50 strike price is $1.50.

The price for the February 17 expiration at the 29.50 strike price is #1.45.

Add the two costs / premiums together and that equals $2.95.

What that would tell us is we can anticipate INTC moving 2.95-points on the earnings announcement.

What one would need to break even in the event they opened a straddle trade for $2.95 per contract is for INTC to move that 2.95-points.

Then one would need the stock to move even more than that to get profits over and above that initial cost.

There lies the key.  Now that you have been educated on a way to gauge a potential price move amount on earnings, one has to decide between them and their brokers if they feel a price move of that amount or more is possible.