Capitalizing on Quarterly Earnings with Weekly Options

Breaking down earnings season and weekly options with trading guru, Bernie Schaeffer

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    Weekly options are a popular form of options trading that has taken the stock market by storm in recent years. Traditional stock trading is not as popular as it once was due to the introduction of several derivatives, especially such as options, into the marketplace. Options are similar to stocks, but involve contract rights that the holder can choose to sell or buy at a set price or date. Options are much cheaper than stocks, and provide significant leverage. Weekly options an even more leveraged and more short-term type of options. Weekly options originally meant that the expiration period lasts for up to one week only, but now means that there are weekly options that expire every Friday with the exception of monthly options expiration Friday each month.

    When trading weekly options, the options trader is looking for high implied volatility. Let's now note that there are many options trading strategies that can be applied to weekly options, most like options in general, that can be incredibly profitable in an even shorter period of time. There are two ways to capitalize on weekly options trading strategies: work with the experts to earn while you learn and/or spend a great deal of time mastering the concepts and strategies and trading drivers that make weekly options traders successful.

    For the former, Schaeffer's Investment Research offers a wide variety of weekly options trade alerts that include Schaeffer's Weekly Options Countdown, Schaeffer's Weekly Volatility Trader, and Schaeffer's Weekly Options Trader. All of these weekly options trade alert programs provide precise entry and exit instructions for each weekly options trade, as well as detailed commentary explaining the rationale for every trade so subscribers can learn directly from the professionals while still capturing profit in their own trading portfolios.

    Apart from actually putting to use the available profitable strategies to make the most out of weekly options, traders must consider the surrounding factors that can have a major influence on weekly options trading. One of these major factors that anyone who trades weekly options should be aware of is a company's quarterly earnings report.

    This article will walk you over the significance of company's earning reports when it comes to profiting from weekly options trading and weekly options trading strategies.

    What are Earning Reports?

    Earnings reports act as a periodic updates on the financial health of a particular company. An earnings report (also known as income or profit and loss statement) is a document issued by a public company that explicitly shares the expenses, company earnings, and net profit the company made or lost during a specific period. This period of time is typically a 3-month period, or a quarter. Investors are primarily keen to assess a company's earnings report to look at its financial sustainability before making any long-term investment decisions. Traders, on the other hand, would be well-served to look at expectations versus reality as well as the reaction the underlying stock has to the earnings report.

    How can Earning Reports Influence Weekly Options Trading?

    When trading weekly options, a trader is utilizing a shorter period of time to hold the position and requires the ability to make quick and impactful decisions on entering, managing, and exit each weekly options position. As far as earnings go, traders must be able to quickly review the company's quarter earnings report, compare these numbers against analyst expectations, and review sentiment data before making a call on the anticipated direction of the underlying stock through the utilization of weekly options. A review of previous earnings beats and earnings misses would also be useful in determining how an earnings report typically impacts the underlying stock.

    Despite the fact that earnings reports can play a strong role in the price action of a stock pre-earnings and post-earnings, the long-haul financial health of a company is less of an issue for weekly options traders than it is for long-term stock investors. The short-term movement ahead of earnings reports and following earnings reports can be incredibly volatile, presenting a great opportunity to utilize weekly options as long as a trader has an edge on his prediction on the underlying stock's direction.

    What is the Impact of Earning Reports on Implied Volatility?

    Traders are usually given a very limited period of time to assess a potential options play following the release of a company's quarterly earnings report. There is a significant amount of information that one must digest to fully review the trading opportunity. It's appealing to most traders and investors to make predictions about earnings outcomes ahead of the event, rather than to wait to review the information and predict future stock price movement. The uncertainty in that underlying stock pre-earnings is what gives air to implied volatility.

    Implied volatility is another tool utilized by traders to assess the underlying stock's potential movement in the future. Implied volatility rises as a company's earnings date approaches with greater uncertainty as to which way the the stock will go following its release. Increased volatility raises option premiums and makes weekly options much more expensive. However, as soon as the earning report is released, implied volatility undergoes a dramatic drop as the stock minimizes perceived uncertainty. The price of the weekly options is also dramatically lowered. This is called volatility crush. After a volatility crush, weekly options are much cheaper and provide great opportunities for those who can act swiftly post-earnings.

    What Strategies Should a Trader Use with Weekly Options?

    At Schaeffer's Investment Research, we see a wide variety of opportunities to capitalize on weekly options utilizing options trading strategies. As a matter of preference, weekly options traded as simple call and put buys are our strategy of choice. Long options are simply the ideal options strategy. Buying options allows traders to capitalize on the concept of convexity, where the downside risk is capped while the upside potential is theoretically unlimited. We offer two trading programs that focus specifically on buying put and call weekly options: Weekly Options Trader and Weekly Options Countdown.

    There are, of course, other ways to utilize weekly options in a trading portfolio. One such way is by utilizing the straddle options strategy. This strategy allows a trader to bet on significant movement in the underlying stock without picking a direction, which is a great fit for a pre-earnings weekly options trade. Schaeffer's Investment Research offers an incredibly popular real-time trading alert program focused specifically on weekly options straddles called Weekly Volatility Trader.

    Ultimately, as any good advisor will tell a trader, it is critical to diversify the strategies one uses in the stock market. Putting all of your eggs in one basket is not a good approach, and opens a trader up to significant downside risk. Diversification in options trading is a critical key to successful usage of weekly options.

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