Transcription
I recently traded Tesla earnings for almost 200% gain, and the craziest part about it? I didn't even have to guess direction. As a matter of fact, I haven't lost a single earnings trade this entire year, and I'm going to show you exactly how.
Now, you might think this is too good to be true, but I promise you, it isn't. It's not that I play every single earnings; it's that I'm very careful about which earnings to play. It has to meet exact criteria, and I'm going to tell you exactly what that criteria is. And after it meets that, then I only trade one of two strategies. And yes, the best part about it? I don't even have to guess whether the stock is going to go up or down before earnings. I'll first show you the latest example, and then I'll walk you through the exact steps. Let's go.
So, here, as I said, Tesla beats the expected move 75% of the time. Don't worry, more on that later. This is an asymmetrical bet, otherwise, I don't trade earnings. I'm buying the 2272 200 strangles. So, I'm buying the 2272 call and the 200 put. For those of you beginners, you might be flabbergasted here, saying, "Wait, I thought you had to guess either up by buying calls or down by buying puts?" No, you can actually formulate an option strategy where you are neutral, and you just need a big move in either direction. However, if you try to do this for every single earnings play, you will likely lose a crap ton of money because you are missing a very important context. Anyway, so I ended up buying the 2272 call and the 200 put. As you can see here, the call side was up 490%, the put side was at a max loss for a net gain of 200% in the overall position. Now, if Tesla tanked, it would have been the same result, as long as it tanked by the same percentage. Here's my last earnings play on Zoom, 51% overnight. Here's my last earnings play on Microsoft, 66% overnight. So, how do you play earnings without having to guess calls or puts? I promise you, after you learn this, you will stop gambling. This will all make sense to you.
So, Step One is figuring out whether the stock that you were looking at, or the stock that is going to be reporting earnings, beats or meets the expected move most of the time. This is where the asymmetrical part comes in. Now, for those options newbies, what do I mean by this? You might not know this, but on earnings, there is an expected move for each stock, meaning up or down by a certain percentage, right? And this is dictated by the options market. How are options traders betting on the stock? And depending on how they're betting on the stock, it's going to create a wide VAR in the price. If you have a lot of options traders betting that Tesla's going to moon, and a lot of options traders betting that Tesla's going to tank, that is the expected move. Now, you'll see some stocks like Apple, where this is much more muted. They're not expecting a big move in either direction. But you want to find out whether the stock beats the expected move, meaning either trades above or below the expected move range most of the time, or stays within the expected move, below the higher end and above the low lower end, most of the time.
So, if we look at Tesla here, I'm using Market Chameleon here, by the way. If you want access to Market Chameleon and you want a discount, click the link below. You can do this manually. You can also use something like Unusual Whales. As you see here on Unusual Whales, it will tell you the implied move for each earnings. You can see here for Tesla, October was almost 7%, in July it was almost 8%, 8%, 6%, etc. So, it will tell you the expected move. However, you have to do a little bit of research to go back and find out the day after earnings, did Tesla actually beat the expected move, right? Did it move more plus or minus 7% in this case, or did it stay within the expected move? And how many times did it do that?
So, if I take a look at Market Chameleon, it shows me the last 12 earnings, and it says here that the options market overestimated Tesla's stock earnings moved 23% of the time, meaning that Tesla beats the expected move, right? Trades below the expected move 77% of the time. And you can see here, these blue lines in Market Chameleon, this is the range that Tesla's expected to trade, right, above or below that. And you can see when the price breaches above that. So, in this case, it beat the expected move above, beat the expected move below, beat the expected move above, below, below, below, below. You can see that it beats the expected move most of the time. And the last time that it stayed within the expected move was actually October 2022. Now, the rules that I set for myself in general, if it beats the expected move or stays below the expected move 70% or more of the time, then that is an earnings that I want to trade. That is why I don't trade a ton of earnings.
So, if we look at a stock like Amazon, for instance, you can see here it says the options market overestimated Amazon stock earnings move 46% of the time. That means about 54% of the time it beats the expected move, 46% of the time it stays within the expected move. There is no asymmetry there. There isn't any disproportionate data that I can leverage in order to create an option strategy around. It's 50/50, and I don't trade 50/50 earnings. So, Amazon would be an example of a stock whose earnings I will not trade.
Anyway, back to Tesla. Now that I'm armed with that, and I know that Tesla is an earnings that I want to play, like I said, I want to know if it beats the expected move most of the time or meets the expected move most of the time.
Now, Step Two: If it beats the expected move most of the time, then there is a type of option strategy I want to trade, and that is called a strangle. Now, a strangle is when you buy a call and a put, just like I showed you with Tesla. I bought the 2272 call and the 200 put. How do you pick your strike prices? Well, the reason that I play a strike strangle and not a straddle is because strangles are cheaper and usually end up in a bigger percentage gain than a straddle. So, a straddle is when you buy a call and a put at the same strike price. So, it would be an example of a straddle would be if I bought the 265 call and the 265 put, right? That is a straddle. A strangle is if I say, buy, in this case, this is after earnings now. So, let's say that I buy the 300 call and I buy the 250 put. That is a strangle because the strike prices are different.
So, the way that I pick the strike prices when I'm playing earnings in a strangle, remember strangles are cheaper and usually end up in a bigger percentage gain than a straddle, is I stick to the 25 delta. Why the 25 delta? Well, because I can go at the money and buy something that is much more expensive. However, if the stock beats the expected move, right, then the 25 delta is simply all you need in order to make money. So, it's, it's a trade-off between not being so expensive and still benefiting from the stock beating the expected move. If you go too far out of the money, right, below a 25 delta, then the stock can still make a big move, and you could still lose money or break even because you were too far out of the money. And if you go too close to the money, you will make a lot of money. However, if the stock doesn't make the expected move, you will lose the money that you paid for that strangle. So, it's a trade-off between it being cheap enough and still being viable enough if the stock beats the expected move, if that makes sense, right? Because I don't want to lose a crap ton of money if the stock doesn't make the expected move. So, that is why I go 25 delta. And at the time, this 200 put and this 227 A2 call that you see here, those were the 25 delta strikes on the call side and on the put side.
Now, what happens if the stock doesn't beat the expected move? Well, then yes, you will lose, lose most of the value of that strangle overnight. And in terms of the expiration date, because I'm trading earnings, this isn't something long-term. So, I usually pick the end of the week, right? So, if Tesla reported earnings on Tuesday or Wednesday, then I will pick Friday's expiration. So, because you don't really have any Theta in your favor if the stock doesn't beat the expected move overnight, then you can lose most of the value of that strangle. The good thing about this is it is a risk-defined strategy, meaning what you paid for the strangle is your max loss. And that's why we go 25 delta because we want to minimize the loss. And yes, of course, even though I haven't lost a single earnings trade this entire year, you can obviously lose money. And if you do this enough times, of course, you will lose money. It's just you want to win more then you lose. And if we stick to this data and only trade asymmetrical earnings trades using a bidirectional strategy, then you will come out winning more than losing.
All right, Step Three: What if you have a stock that doesn't beat the expected move most of the time, like Zoom? As I said, 70% of the time it doesn't beat the expected move. Well, if we go back to the Zoom play, what I did here, right? Instead of buying a strangle, because when you buy a strangle, you're expecting a big move in either direction, because 70% of the time Tesla beats the expected move, either up or down. So, in this case, if a stock doesn't beat the expected move and stays within a small range most of the time, then you want to trade something like a short iron Condor. Set selling an iron Condor. And an iron Condor just means that you want the stock to stay between a range, right? So, it's made up of a short put spread for the low end of the range and a short call spread for the high end of the range. So, you can see here with Zoom, I sold the 5556 put spread and I sold the 6566 call spread. So, I need Zoom to stay between 56 and 65. That's it. If it stays between 56 and 65, then I gain most of the value of that iron Condor the next day, especially because IV drops right after earnings and Theta tanks as well right after earnings. So, if the stock stays within that range, the following day, you get to collect most of the value of that iron Condor. And because this is different than a long straddle, a long straddle is a debit, meaning you are buying it. In this case, you are selling the iron Condor, so the most that you can make from an iron Condor is 100%.
Now, in both of these cases, the long straddle and the short iron Condor, you will want to close it the following day immediately if it's in profit, right? You don't want to mess around. So, you experienced options traders might already know this, but the way that a long strangle looks on a graph is like this, right? Where you want the stock to make a big move in either direction. The way that an iron Condor looks on a graph is like this, where you want the stock to stay in between this range here, right? So, in this case, with Zoom, it was, I believe, the 56 on the put side and the 65 on the call side. I needed Zoom to stay in between this the following day.
So, that's really it. No rocket science. No gambling. Not buying naked calls or naked puts, hoping for the best. If I guessed calls on Tesla, I would have made almost 500% instead of 200%. But what if I guessed puts? Right? Then I would have lost all my money. So, the point is not to make the most money. The point is to have an asymmetrical bet where I don't have to guess the direction, and I can make money in either way. In the strangles case, I just needed to make a big move up or down. And in the iron condor's case, I just needed to stay within a range. Obviously, if you do this enough times, you will lose an earnings trade. It's not going to be 100% all the time, but this is the only way in my view to play earnings if you want to make consistent profits and not have to gamble every single time and be like, "Oh, I won. Oh, I lost. Oh, I lost another one. Oh, I lost another one." The market is not a casino. Treat the market like a casino, and it'll treat you like a sucker.
So, this way, I get to leverage data and only trade earnings that stick to my certain criteria. Does it meet or beat the expected move most of the time? If so, if it beats the expected move most of the time, I trade a long straddle with the 25 deltas. If it meets the expected move most of the time, then I trade an iron Condor, also at the 25 deltas on the call side and the put side. And if you want to follow all of my trades in real time, I also go live at market open every single day, and I day trade futures. Click the link below, join us in the academy, watch me live stream every single day. I guarantee you, it's better than paying for all the streaming services you pay for that don't have a ton of value. In this case, you get to stream something where you watch me day trade live every single day. Sign up to Market Chameleon below. Let me know in the comment section if you got anything out of this. Subscribe to the channel, hit that notification bell. Stay safe out there, traders. Peace.