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How to Avoid Getting Crushed Playing Home Run Derby With Earnings

by | Oct 21, 2022 | Options

Be sure to check out Crush the Open, LIVE at 9 a.m. EDT on Monday morning with myself and my boy Lance Ippolito. We’ll talk a little personal stuff, maybe some football and definitely some stocks — it’s a fun time, so pour yourself a cup of coffee and join us!

It’s earnings season of course, and next week is going to be amazing… There’s a star-studded lineup of big tech companies that we’ll talk about.

But first, the two big ones this week were Netflix Inc. (Nasdaq: NFLX) and Tesla Inc. (Nasdaq: TSLA)… 

Lance and I discussed an important lesson on Crush the Open that’s imperative to learn if you want to be successful trading options… implied volatility. 

So ahead of earnings, NFLX had an implied volatility of 13%. But what does that mean? 

It means just to break even on the weekly call option, you need the stock to move more than 13% higher if you buy call options — which is a BIG move. The stock did rise about 17%, but the options were only up about 60%… That’s not great considering how much risk you have on the downside. 

So let’s say you placed the trade and got it right. You likely didn’t make much… And if you were wrong, you would have lost almost if not everything — that’s what I mean when I say this is a terrible trade from a risk-reward perspective. 

So… if the stock falls… you lose. If it stays flat… you lose… If it only goes up a little… you lose. 

You’re risking too much for a small reward IF you get it right. Look at it like this…

When you open an options position, you’re risking 100% of the premium you pay to buy the contract. If earnings were bad and the stock fell, your weekly option is done… your position is likely going to $0, and fast. 

And if you’re right, you could have made 60%. There’s always this inverted risk-reward when you buy expensive, high-implied volatility options with a short duration, a la weeklies. 

I can’t tell you how important this is to consider when you’re trading short-term options, and trying to play home run derby this earnings season.

Check out my video up top and we’ll discuss high implied volatility, and we’ll also discuss how the Federal Reserve is crushing every rally we’re getting in the stock market.  

Are there any topics you’d like to see me cover or questions you’d like answered? Send me an email at jeff@joyofthetrade.com. And be sure to stay ahead of the markets by subscribing to our YouTube channel and our Instagram page for all of the latest! Don’t forget to like, subscribe and leave us a comment!

You can also join my free Telegram channel, where I share market insights real time throughout the week, articles, videos and more!

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WRITTEN BY<br>Jeff Zananiri

WRITTEN BY
Jeff Zananiri

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