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Consistent income trading options: Earnings and weekly vs. monthly options

Earnings and weekly vs. monthly options

In our quest to understand trading options for income, the topic of this article is to look at a common strategy: playing the earnings game.

Every three months public companies must report their quarterly earnings along with guidance for the next quarter. The day before earnings, we find that the IV (implied volatility) of the current option chain will typically be very high in anticipation of a large move. High IV translates into high prices for options, and this is an excellent opportunity for premium sellers with strategies like strangles and iron condors (IC).

So what is the earnings game? The approach is to open a position with a strangle or IC prior to the earnings announcement, when IV is at its highest, and then exiting the position after the announcement, when IV collapses.

Since many equities (especially jumbo stocks like Apple (AAPL), Google (GOOG), Goldman Sachs (GS), and Amazon (AMZN)) have Weekly options in addition to Monthly options, the question often asked is: Which option chain works best; the Weekly or the Monthly?

Tasty Trade recently ran a test to answer this question. They used the above listed jumbo stocks over the past three years of earnings cycles, or a total of twelve trades per stock. The option strategy used was a strangle with the short strikes at 1 SD (standard deviation) from the current stock's price. For the Weekly, the approach was to exit the position the next day. For the Monthly with approximately 28 DTE (days till expiration), the approach was to exit the next day with a profit, or wait till 50% of the premium was realized before exiting if the next day was not profitable; else wait till expiration when a profit or loss is realized.

In actual trading, keep in mind that a losing position must be closed prior to expiration to avoid assignment in which you have to purchase (or sell short) the stock. For each option contract, that represents 100-shares, which could be very expensive with jumbo stocks.

The results (see table above)? For GS the maximum profit was the Weekly (closing the position the next day), and the biggest loser was the Monthly waiting for 50% of premium (or held to expiration).

GOOG has losing trades for both the Weekly and Monthly approaches, with the Weekly being the largest loser. This would indicate that 1 SD is not a good risk level; perhaps 1.5 SD or 2 SD would be better levels.

AAPL had all approaches profitable, with the most profitable being the Monthly held to 50% (or expiration).

And AMZN performed similar to AAPL, with all approaches profitable, and the most profitable being the Monthly held to 50% (or expiration).

In conclusion, playing the earnings game can be very profitable; just remember to either adjust or close losing positions to avoid assignment.

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.