Playing Earnings Like Market Makers


Simpler Trading Team

Jul 20th 2021  .  3 min read

This is one of those weeks when traders might look at the charts in this wild market and say, “I got nothing.”

What to do?


Consider the possibility of using options to trade earnings.

Companies typically report earnings every quarter, although these reports can be presented throughout the year because not all companies report at the same time of year, i.e. April/July/October/January.

How do you start trading earnings now?

Stocks can make incredible moves before, during, and after companies announce earnings.

The key is targeting trades while limiting risk because earnings reports can twist and turn price action more so than expected. Any opportunity for great reward – earnings trades – comes with increased risk.

Simpler’s traders don’t trade “naked” during earnings – buying a put or call through an earnings report and hoping for a home run.

Knowing how the market views earnings is very important. The market makers have already priced in an expected earnings move. Popular stocks like Big Tech (Microsoft, Apple, Facebook) will have an expected range of movement based on the assessment of market makers.

Consider that Facebook recently reported earnings recently and the expected move was $15. So if a trader bought calls and the stock moved $8, the trade was a loss because the market makers priced in a $15 move.

Many traders are unaware of how this plays out, and they lose money.

Something else can also lighten the trading wallet.

A company might announce stellar earnings, but the stock price still goes down. How does that happen? You have to understand that the market expected a different outcome.

This is why buying calls or puts and holding through earnings is a risky proposition. Sure, every now and then a trader might get a big home run with this play, but it’s not a consistent strategy.

Simpler’s traders focus on the goal of creating an equity curve that goes up from the lower left of the computer screen to the right (an uptrending account balance). To do this, consistency is needed in trading.

Placing high-risk bets on earnings doesn’t help achieve that uptrending equity curve.

When it comes to earnings, Simpler’s traders work setups that are on the same side as the market makers. They do this by selling a call credit spread or selling a put credit spread (as opposed to buying a call or buying a put).

When earnings reports are released, the stocks can have their crazy movement. And if that price action is within the expected move, the spreads are set up to make money.

The key is to structure earnings trades as a spread. While this setup limits potential profit, it also strictly limits risk.

Singles and doubles during earnings have the potential for consistent gains vs. swinging for the fences.

We Saw: Roller coaster rebound after market losses Monday –

  • Politicians celebrate more spending to “fight inflation”
  • Bitcoin pullback erases gains for the year so far
  • Sales of pricey space tourist flights keep growing

We’re Watching: Very little, staying out of the fray –

  • Fiery debate on whether popular stocks are overvalued
  • For any squeezes that reveal an edge
  • Possible pivot to earnings trades with an advantage