Defined Risk Options Strategies Around Earnings

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Tom Sosnoff and Tony Battista look into using defined risk options strategies around binary events such as earnings. They analyze a number of different strategies to find out which ones provide the best return on capital and probability of success.

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Juan Valdez says:

Very interesting study/insights, but there was no info on the exiting of these different types of trades. When /under which conditions do your exit these trades ? Simply the day after earnings ?

tastytrade says:

Hi, Pal T – Here are some important criteria we go through:
• Enough liquidity in options
• Check previous stock movement and post earnings movement, and then come up with your own assumption of directional bias after earnings (this varies by individuals). Let’s say if you are a contrarian like us, we would more likely to short put than call if the price has been beaten down for a while
• Check the potential movement by using pre-earnings IV and choose 1SD/2SD or any strikes we feel comfortable with. There is no universal rule for choose your trade risk
• If you have higher risk tolerance, use naked options, if not, use IC or spread to define your risk
Please remember that trading earnings should use small percentage of your capital, it associates with higher risk in short-term, which is hard to manage. Hope this helps – thanks for commenting!

Pal T says:

i get the whole vol contraction idea around earnings. But how do you know what to short? Put or calls? and how far away from ATM? Or do you short a Neutral Strategy play, like a short iron condor or something that's similarly safe?
Any feedback would be great! Love your team and sites. Im a member :)

Chris Matuszewski says:

This study sounded great, but then I noticed your second set of data had 5 fewer trades. I thought all the same trades in the first set were supposed to be in the second set?

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