Earnings season kicks off next week with some big name companies due to report earnings including Citigroup (C), JP Morgan Chase (JPM), Delta Airlines (DAL), Wells Fargo (WFC), Blackrock (BLK), Unitedhealth Group (UNH).
In today’s article, we will look at how to use Barchart’s Screener’s to find option trade ideas for this earnings seasons.
Stock Screener
The first step is to use the Stock Screener to find companies with good option volume and upcoming earnings. Here’s a good scan that you might like to use:
- Total Call Volume greater than 2,000
- Market Cap greater than 40 billion
- Latest Earnings Date Between October 9 – October 20
This will give us companies with earnings releases this week that have good option volume. Trading stocks with good option volume is important because it will mean it is easier to get filled on trades and the bid-ask spread is likely to be lower.
The above screener gives us these results:
Now we can pick the company or companies we want to trade and decide on a strategy. Let’s look at a couple of examples.
JPM Iron Condor
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using the October 13 expiry, we could sell the $135 put and buy the $130 put. That spread could be sold yesterday for around $0.60.
Then the bear call spread, which could be placed by selling the $150 call and buying the $155 call. This spread could also be sold yesterday for around $0.45.
In total, the iron condor will generate around $1.05 per contract or $105 of premium.
The profit zone ranges between $128.95 and $151.05. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.05 x 100 = $395.
Therefore, if we take the premium ($105) divided by the maximum risk ($395), this iron condor trade has the potential to return 26.58%.
If price action stabilizes, then iron condors will work well. However, if JPM stock makes a bigger than expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. JPM has stayed within the expected range following four of the six most recent earnings releases. Although as we know, past performance doesn’t guarantee future performance.
Traders can also use the Bull Put Spread Screener if they have a bullish outlook or the Bear Call Spread Screener if they have a bearish outlook.
Conclusion And Risk Management
Trading options over earnings can be risky and is not recommended for beginners. Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short strangles involve naked options and should be avoided by beginner traders.
Short-term trades also have assignment risk, so traders need to be aware of that possibility.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
