EXIT STRATEGY FOR TRADING EARNINGS

An exit strategy for trading earnings needs to take several factors into consideration. The most important decision is whether to exit when the trade is already profitable before the earnings report is given, or to wait for the report in anticipation of a further increase.

EXIT STRATEGY CONSIDERATIONS

This article takes some examples to consider whether it would have been better to exit before the earnings reports or to hold the trade until after the report.

As most traders realize, there is a 50/50 chance that the company stock price could go either way after reporting earnings – even if the report is good, the stock price could reverse – and if you hold a call option this means depletion of an already good profit if it exists. A similar situation can be found if you hold a put option, and a report is not that sound (and you expect a profit from this) but the stock price can, at times move upwards due to traders bias or other external conditions.

COMPARING EXIT STRATEGY APPROACHES

The tables below offer a comparison of the potential profit that would have been realized in the case of exiting the trades before the earnings reports or after the reports.

Keep in mind that these examples are from Stock Options Made Easy, and are for monthly options, however when trading weekly options the same principles apply.

TABLE A - TAKING PROFITS BEFORE EARNINGS REPORTS

DATE TRADE GAIN
June 04, 2018 COUP JULY 20 2018 55.000 CALL P.P: 37%
June 05, 2018 YY JUNE 15 2018 130.000 CALL P.P: 55%
June 06, 2018 SIG JULY 20 2018 40.000 PUT P.P: 0%
June 06, 2018 FIVE JUNE 15 2018 75.000 CALL P.P: 438%
June 07, 2018 AVGO JUNE 15 2018 260.000 CALL P.P: 120%


TABLE B - TAKING PROFITS AFTER EARNINGS REPORTS

DATE TRADE GAIN
June 04, 2018 COUP JULY 20 2018 55.000 CALL P.P: 163%
June 05, 2018 YY JUNE 15 2018 130.000 CALL -78.5%
June 06, 2018 SIG JULY 20 2018 40.000 PUT -91%
June 06, 2018 FIVE JUNE 15 2018 75.000 CALL P.P: 1,760%
June 07, 2018 AVGO JUNE 15 2018 260.000 CALL -17.5%

The End Result……

In this instance it appears that it would have been more beneficial, when looking at the total profit, to take profits after the earnings report was announced.

By exiting the trade before each earnings report was announced, a total potential profit of 650% could have been made, and this would also have alleviated any concerns of stock direction after the report.

On the other hand, taking the profits after the earnings report certainly paid off; with a total potential profit of 1,736%.

However, there were three companies that reported that did not match the desired options trade direction. The input from Five Below’s potential profit of 1,760% was certainly the saving trade for this particular week.

A DIFFERENT OUTCOME

The week prior to the above example shows the opposite result for using an exit strategy of opting out prior to earnings reports, rather than waiting. The tables below are from a week that was less successful than the average, but where a profit could still have been made by exiting trades before earnings reports.

In this instance, by opting out before the earnings reports, the potential profit would have been 168% compared to a loss of 117% when exiting the trade after the results had been announced.

TABLE C - TAKING PROFITS BEFORE EARNINGS REPORTS

DATE TRADE GAIN
May 29, 2018 CRM JUNE 15 2018 130.000 CALL P.P: 55%
May 30, 2018 BOX JUNE 15 2018 28.000 CALL P.P: 44%
May 31, 2018 COST JUNE 15 2018 200.000 CALL P.P: 34%
May 31, 2018 ADI JUNE 15 2018 97.500 CALL P.P: 25%
JUNE 01, 2018 ANF JUNE 15 2018 25.000 CALL P.P: 10%


TABLE D - TAKING PROFITS AFTER EARNINGS REPORTS

DATE TRADE GAIN
May 29, 2018 CRM JUNE 15 2018 130.000 CALL P.P: 55%
May 30, 2018 BOX JUNE 15 2018 28.000 CALL -80%
May 31, 2018 COST JUNE 15 2018 200.000 CALL -43%
May 31, 2018 ADI JUNE 15 2018 97.500 CALL P.P: 25%
JUNE 01, 2018 ANF JUNE 15 2018 25.000 CALL -74%

A FINAL WORD ON EXIT STRATEGY FOR TRADING EARNINGS

It is always important to use discretion when deciding whether to take a profit earlier, even if it is a modest profit, or to hold out for the possibility of a higher profit that goes hand-in-hand with greater uncertainty.

Back to Weekly Options USA Home Page from Exit Strategy for Trading Earnings


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