We’re right in the middle of the most important week of earnings in years.
I know I’ve said it a million times, but I love playing cheap options for earnings events.
These unknown events are the four times each year where we have the best chance to see big moves in stocks.
But because of the volatility spike from unknown events like earnings, it also means options premiums are a lot more expensive.
When I say “cheap” options play, you’ve probably noticed I like to trade options around $3 a contract or less (so $300), especially for earnings…
Because I’m not about to risk a penny more than I have to for exposure to these major catalyst events…
The Advantages of Cheap Earnings Option Plays
Look, trading earnings is risky — trading itself is risky. As we’ve seen, we can get everything right and if the stock doesn’t move beyond the market maker’s expected threshold, the option can lose steam in a hurry.
So traders need to scale down position sizes during earnings and look to play short-term, cheaper options to get to where the action is.
We know when the catalyst is — the report date and time — so there’s no reason to buy contracts months out. Going too far beyond the next monthly expiration just means paying an even higher premium for an option that’s less sensitive to changes in the stock price.
Why would I spend $1.40 to buy September calls on Ford Motor Co. (NYSE: F) as an earnings play when I can get the same strike price in the weekly or monthly expirations for a third of the premium or less?
On top of that, it’s important to stay nimble in volatile markets like this. Tying up a lot of cash in long-term positions limits a trader’s ability to capitalize on trending order flow that hits — especially for smaller accounts.
Now I’ll be honest, these aren’t high-probability trades… But with cheaper options, traders have more control over how much money they want to risk on any single position.
That way, if the worst happens and that trade goes to zero, I know I’m risking an amount of money I can walk away from without a second thought, on to the next.
Check out the video and let’s talk about the advantages of cheap earnings option plays.
P.S. We’re at the peak of spring earnings season…
And with high volatility… comes crazy opportunities!
Just last week, Netflix put options exploded 9,499% higher as the stock crashed from $348 to about $220 a share — literally overnight from April 19 into April 20.
Trading earnings can be tricky… But I’m here to help!
Let me prepare you for the week ahead with my Unusual Options Activity Workshop: Earnings Edition!