How does earnings season can impact option trading? Earnings season happens four times a year, and is when corporations reveal their financial results for the previous quarter.
Results of a company's earnings report can have a major impact on the stock price, and options will often price in the expectations before the event so it's likely that options premiums are more expensive.
This can impact your trading with implied volatility.
What makes up an options price?
- Implied Volatility: the market's expectation for future volatility. Traders don't know which direction the stock will go, but once a company reports earnings, there is no more uncertainty.
So why is this important?
- As an options buyer, higher implied volatility means that you are paying more for your contract & are at risk for a volatility crash.
How is IV measured?
You compare the implied volatility to the stock's historical volatility for exactly the same time frame.
The IV measures the market expectation for future price action & the historical volatility measures the volatility for a stock that already occurred, and all you have to do to see how the IV compares to the HV.
For historical volatility, it makes sense to look at it in 10, 20, 30, 40 days increments.
Why you shouldn't sell options into earnings.
Earnings plays are hit-and-miss, & sometimes stocks jump dramatically.
It's best to focus on SRC profits:
- Systematic because I like to trade what I see and not what I think.
- Repeatable and by trading my plan.
- Consistency.
With The Wheel strategy the idea is to get paid while you wait to buy the stock by collecting premium by selling puts.
Ideally higher IV is good for this and as a rule of thumb, I look for stocks with an IV, of at least 40%. but I don't trade into earnings, no matter if you're buying or selling.
Earnings are a wildcard and there's just too much uncertainty. It's always good to know when they report earnings if you have any open positions, whether you're buying stocks or selling stocks so that you're not caught off guard.
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