Identifying High Profit Opportunities During Earnings Season

2018-01-29 | Danielle Shay Gum

Identifying High Profit Opportunities During Earnings Season

One of the most common comments that non-traders will make to me when I tell them that I am a trader is ‘that must be nice when the market is going up, but once it goes down I suspect you’ll be looking for different line of work.’ Of course, a powerful directional market makes an aggressively directional trader like me love waking up in the morning to get my trading day started. And to be fair, I suppose I may have thought the same before I truly learned how the markets work. However, that really isn’t the case. In the markets, there is opportunity all around us, at any time – you just have to know where to look.

The truth of the matter is, as an options and futures trader, there are some very clear simple truths:

  1. You don’t need to be a millionaire – or even have a large chunk of change to trade in the options market. Most of the trades I place are generally around $1,000, and many of them are even between $300-750 investment that is held for about 1-2 weeks.
  2. We can trade any type of market and make money, if you know the right strategy – up, down or sideways. If you’re like me and you LOVE the trending market, all you must do is learn how to master that via options.
  3. There are certain key moments in time to make money directionally – right now is one of them. Learning how to identify those moments is how we make money.

So, you ask, how do you both identify and trade these moves? Well, right now, a major part of that comes through earnings season and the opportunities it presents.

The Run into Earnings

Some of my favorite, directional, trend following opportunities present themselves in the weeks leading up to earnings reports on key companies. This season, I selected plays in $BABA, $HON, $MMM and $AAPL that have already ran their course, and I’m long a couple others that will complete themselves this week. Three out of the four worked just as planned. How did the stars align?

Honeywell International Inc ($HON)

Honeywell has been on my radar because it’s one of the strongest stocks within the $XLI – the SectorSPDR Industrial sector. Knowing earnings was coming up, I analyzed the chart, looking for symmetrical pullback zones as well as any sign of upward price movement. I was able to identify a strong symmetrical support zone as well as a squeeze on the daily timeframe. This gave me a solid buy entry point for a run into earnings via long options in HON.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/

Using this method of technical analysis, I scaled in to four long calls – for a total investment of a combined $1194 on January 4th and January 8th. A week and a half later, I was out, profiting a total of $1252 on my long calls, more than 100% of my initial investment. This high probability moment in time gave me quick profits on a small investment. As you can see from the chart, HON traded almost directly higher into the earnings report, stalling at the 127.2% and 161.8% extension levels (completely normal and expected) which is where I took my profits.

Alibaba Group Holding Ltd. ($BABA)

Alibaba gave me excellent returns last quarter for a run into earnings, so this quarter I was more than willing to place a bet on this one. However, that’s not the only reason I took an entry. I also identified a symmetrical pullback zone, which gave me a solid level of support in the time frame I like to buy before an earnings report. This chart didn’t have a squeeze, but for me, this was enough.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/
BABA Run Into Earnings

On this one, the options were slightly more expensive than HON, so I only picked up two, for a total investment of $1,060. Scaling out at the 161.8% extension level, I was able to double my investment, taking profits of $1,320. Now, look at this BABA chart – I’m happy with my profits but BABA has continued to trade higher, and there are still several days until they report earnings. This is an example where scaling out in thirds instead of halves would have been more beneficial. However, at the end of the day – I’ll take my double and be happy with it.

3M Co. (MMM)

I liked this trade on MMM because it’s one of the strongest stocks in it’s sector, and, just like HON and BABA, it held daily symmetry that triggered for a buy. This symmetrical level did come in a bit lower than price, but the fact that it held symmetry was important to me. With this trade, I ended up getting out when price stalled at the 127.2% extension level instead of holding into directly before earnings, but it still gave some solid profits.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/
MMM run into earnings

For $MMM, my initial investment was $840, and I ended up profiting $580 on the trade. For only two contracts, that’s not bad!

Apple Inc ($AAPL)

I got long AAPL because it’s one of the main FANG stocks that tends to benefit from a run into earnings. However, you can’t win them all. Right after I got into this trade, some bad news about AAPL hit, and it has not recovered. Even though AAPL initially triggered at my first level of symmetry support, after it began falling, it proceeded to fall through all of my symmetrical buy zones, and I got out of this one for a loss.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/
AAPL run into earnings

On this trade, I had an initial investment of $1,005, and ended up getting stopped out with a loss of $369 when symmetry was broken. They aren’t all going to work, but it’s important to know what level to get out when they fail.

This Week’s Opportunity

Checkout this image from www.Earningswhispers.com, one of my favorite resources for earnings related data. It features many of the key earnings announcements coming up this week.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/

For this week, I have current open positions in both $MA and $BA, both for bullish runs into earnings, and I’m sure I’ll be trading the reports of $MSFT, $MCD, $PYPL, $UPS and more.

A Current Run into Earnings – Boeing Co ($BA)

We’ve had several great runs in BA, and a run into earnings is another great place to get long. I entered this trade a couple days ago, before the 78-minute squeeze fired for a bullish run into earnings. My initial investment was $1480, a bit higher than I usually invest, but as BA is one of the strongest stocks in its sector, I decided I was willing to take on the risk. Can BA make it to $160 before the report? We shall see this week! I’ll be analyzing this chart daily in the trading room this week.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/
BA run into earnings

 

A Current Run into Earnings – Mastercard ($MA)

With MA, I broke my rules slightly, as I did not wait for a pullback buy entry on symmetry to enter this trade. Why? It’s incredibly strong, the trend is beautiful, and I have solid statistics backing my run into earnings trade. I am currently long calls in MA, with an initial investment of $837. I don’t have specific price targets on this one, as it is currently trading at all-time highs and that makes Fibonacci extensions a little tricky. However, I do plan to ride this wave until directly before the earnings report. At this point, it’s more of a time trade for me.

(Click on the image below to enlarge)

https://www.simplertrading.com/earnings-opportunities/
MA run into earnings

Want to Learn More?

These are all trades that I’ve presented my analysis on, as well as entries and exits in our Simpler Options live trading room. $MA and $BA are still open positions, and I’ve been trading the actual earnings reports as well as the post-earnings runs as well along with the rest of our trading team. I remember how hesitant I used to be about trading the volatility that comes with earnings, but over time I’ve begun to realize just how much opportunity that volatility truly means for options traders.

Read this blog, ‘Earnings Season – The Opportunity Around Us’ to learn more about how we trade earnings at Simpler Options.

Check out our membership that includes the Simpler Options Live Trading Room.

Already a member?

Check out this webinar I taught last week – Surviving Earnings Season. During this webinar, I discuss the costs and benefits to trading earnings season, and detail a few of the strategies we like to use.

Happy trading,
Danielle
@traderDanielle on TWTR

5 thoughts on “Identifying High Profit Opportunities During Earnings Season

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