Ask the Experts: Trading Events Outside of Earnings Season

Earnings season is wrapping up, but there are still plenty of stock market events that could spark significant moves

Sep 8, 2017 at 9:29 AM
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Earnings season is a busy time for many traders, as quarterly results and forecasts can trigger big moves for stocks. That's certainly true for Schaeffer's Senior Equity Analyst Joe Bell, CMT, who's one of the strategists behind our popular Event Trader options recommendation service.

But as earnings season winds down, the calendar of scheduled events starts to get a little thin. So how do traders find and trade events outside of the quarterly earnings onslaught? To answer that question and more, I spoke with Bell about his "off-season" strategy.

KC: Earnings season is winding down. What other types of events do you target for trades, outside of earnings reports?

JB: There can be several different types of events, including industry conferences where companies make announcements, upgrades and downgrades, changes in company guidance, political events, economic reports, industry events, and product announcements.

With a Fed meeting coming up, what are a few different ways you might look to play this type of large-scale macro event? 

It’s all about expectations, and the Federal Reserve makes it a goal to be transparent and give participants information ahead of time to gauge the probability of a rate hike, so traders aren't caught off-guard. Therefore, the event itself hasn’t usually created major market moves in recent years.

If there is a surprise and you have reason to believe there will be a decision that counters the market’s expectations, you may be able to profit from this. The rate decision is one piece of the puzzle, though, and evaluating and analyzing the technical and sentiment backdrop for the market will determine any trade decision.

Currently, the majority of participants are not expecting a rate hike at the September meeting. According to the CME Group’s Fed Watch Tool, there is a 99% chance of no rate hike. Since I don't expect a rate hike at this meeting, I don't think it will be a very impactful event. Expectations, however, can certainly change, and we will continue to monitor the potential of the event.

Is there any way to trade around "events" like the North Korea nuclear threat?

Trying to predict geopolitical conflicts like a nuclear threat is very difficult. With that said, I don’t believe the stock market has priced in a nuclear conflict, so anything related to this would certainly increase volatility. So, you can look for opportunities when volatility increases due to fear stemming from this type of event.

If you believe there will be rising volatility, you would generally want to be long premium ahead of this increase in volatility. Some option strategies to use during periods of rising volatility are long calls, long puts, straddles, and pair trades. Straddles and pair trades can generate strong profits from a large increase in volatility, regardless of whether the move is up or down.

What are the benefits of trading options outside of earnings season?

The main advantage is that implied volatility -- and, by extension, option premiums -- may be cheaper. These lower-priced options could create the opportunity to generate more leverage if you can identify a stock that trends nicely between earnings reports.

 What are the disadvantages of trading options outside of earnings season?

Some stocks don’t tend to move as much as others between earnings reports. The key is to look for historical patterns of price behavior to locate stocks that don’t trade sideways between earnings reports. 

What might deter you from trading a specific event, whether earnings-related or not?

You should always analyze the cost of the option relative to the move you expect the stock to make. There are times when options are so expensive that it creates a huge obstacle for the option buyer. If premiums are too expensive, it is an obvious sign not to trade.

There are also times when a stock doesn't react to an event the way I expected, which creates another cause for concern. I try to stick to my fundamental, technical, and sentiment indicators and let that analysis guide me toward compelling set-ups, as well as away from set-ups that I don’t view as having a good risk-reward trade-off.  

What's a recent Event winner that didn't revolve around earnings?

On March 3, we recommended the April 117 call on the iShares Barclays 20+ Year Treasury Bond Fund (TLT). Ahead of this recommendation, Goldman Sachs noted its underweight position in a letter to its clients, and famed investor David Tepper announced a short bond position on CNBC. We also confirmed a similar bearish sentiment from large speculators in the bond market. In addition, the Federal Open Market Committee (FOMC) fed funds rate decision was also approaching.

Given the pending event and these bearish proclamations, coupled with several strong technical indicators, it marked a good time to fade the crowd. The ETF steadily surged higher over the next several weeks and the option position netted a +179% return by its April expiration.


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