The Evolver’s Guide to Earnings Season

by | Nov 9, 2021

Hey, Evolver.

In case you hadn’t noticed, Q3 earnings season is in full swing! 

This week is especially interesting … Several of social media’s most popular stocks are set to report (AMC, CLOV, SPCE, NIO, COIN, and PLTR — to name a few).

Trading options around earnings reports can be a high-risk/high-reward strategy. But you must be informed. Let’s go over some pros and cons…

Earnings Season: The Pros

For options traders, earnings season can provide a lot of crazy trading opportunities…

Bottom line: people love to trade options during earnings season. It brings out the most degenerate, casino-like tendencies in traders.

Why is this a good thing? Because more money in the options market is great for experienced traders like me. (Hopefully, you’re getting the hang of it yourself!)

Not only does earnings season bring more liquidity — it breeds volatility. The swings based on earnings reports can be massive, making the options volatility even more exaggerated.

Liquidity, volume, and volatility are three critical factors I look for in any options trade. The fact that earnings season naturally delivers all three is hard for me to ignore.

So what’s the catch? Well, there’s another factor that makes trading options during earnings season much more difficult than it may initially seem…

Earnings Season: The Cons

For options traders, the biggest obstacle to overcome during earnings season is higher-priced contracts due to elevated implied volatility (IV)

I often find that earnings winners don’t move enough, especially for the higher-priced stocks. 

Even if a company has solid earnings, the high IV (and expensive premium) makes it difficult to lock in the kind of gains I’m looking for.

For any options trade, I’m looking for 20% moves. That way, there’s enough meat on the bone to grab onto. 

During normal periods, a 20% move in the underlying stock will give me the 150%, 200%, or 300% gains that weekly options have the potential for. 

But during earnings season, IV can ruin these kinds of setups. Be aware of this. Try to avoid contracts with IV above 100%. 

Beyond IV, I’m picky about the sectors (and price action) I’ll trade during earnings. Not only do I want solid earnings beats — I also want the stock to be in a hot sector with prices reaching fresh highs. 

By adding these catalysts, an earnings setup has a better chance of achieving the momentum I want to see…

The key to trading earnings season within my strategy is to be selective. With that in mind, there are two earnings reports happening TODAY (after the bell) that check all these boxes…

Nio Inc. (NYSE: NIO)

EV stocks have been going CRAZY the past two weeks, boosted by the wild volatility in Tesla Inc. (NASDAQ: TSLA)

If Nio Inc. (NYSE: NIO) reports better-than-expected earnings today, it could potentially send the stock into a major rally back toward the $60s.

On the other hand, it’s important to note that NIO has been rising into earnings — up more than 20% in the past month. 

That means if NIO misses expectations, the share price could crater right back down to the low $30s.

Coinbase Global Inc. (NASDAQ: COIN)

Along with the EV sector, cryptocurrency is having a golden moment…

At the time of this writing, bitcoin (BTC) and ethereum (ETH) are both sitting near all-time highs. 

Meanwhile, crypto stocks like Marathon Digital Holdings Inc. (NASDAQ: MARA) and Riot Blockchain Inc. (NASDAQ: RIOT) have been blasting off as well.

Today, the biggest crypto stock of them all — Coinbase Global Inc. (NASDAQ: COIN) — will report Q3 earnings.

COIN options are expensive, so I’ll likely stay on the sidelines. If you look to trade COIN this week, be prepared for major volatility in either direction. 

Lesson Summary

  • For options traders, earnings season is somewhat of a double-edged sword…
  • Liquidity and volatility can tempt you to trade, but you MUST consider the IV of the contracts you’re trading before executing any serious moves…
  • By only trading earnings on stocks in hot sectors, you can expand your chances of booking a big win…

Conclusion

As popular as it is, I actually don’t trade earnings reports very often. Truly great setups are few and far between, and I think you can find better opportunities elsewhere in the market.

I’ll probably be on the sidelines for most of these reports, but I’m still paying close attention. I’m watching for any major rallies (or dumps) that could happen shortly after earnings prints are released.

Whatever you do — remember that earnings gains can disappear just as quickly as they appear in your account. 

Be greedy with your gains and cut any losses immediately.

Meet Mark:

Mark Croock is a former accountant who after studying under Millionaire Trader Tim Sykes turned his small account into $3.19 Million in trading profits by applying Tim’s strategies to options trading.

He started Evolved Trader to pay it forward and help other traders learn how to leverage options

 

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