Trading earnings is one of my favorite things to do.
One of the key advantages to options is the ability they provide traders to devise strategies to profit from big stock movement, little stock movement, no stock movement, or movement in either direction.
For more than 11 years I have used the HIMCRRBTT (him-cribbit) Trading Plan. This systematic trading plan helps me analyze and dissect the best risk-versus-reward trades for any earnings announcement.
Let's look at the first three components of the HIMCRRBTT Trading Plan.
When analyzing an option trade, the first thing to do is check how much the stock has moved in the past eight quarters. I also place a big emphasis on the previous quarter and the same quarter last year. You can get a good feel for what a stock might do if you first look at the earnings cycle of the company and see what the current trend of earnings has been. If I see that a stock has sold off eight straight quarters on earnings, I think there is a better chance it will sell off the next quarter as well. If I notice that a stock has rallied big four times on earnings, and sold off four times, but when it sold off it was a small amount, I can devise a strategy accordingly.
Going into an earnings announcement, the options premiums will be higher, because traders are unsure how much the stock will move on the catalyst. This ...