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Earnings: Fading Big Moves

Aug 29, 2017

By: Sage Anderson

The corporate earnings season is a very important period on the options trading calendar.

Whether it’s big swings in implied volatility or crazy moves in underlying stocks, profitability reports from companies across the trading universe provide traders with a myriad of opportunities.

There are also a wide variety of approaches that traders can take when filtering for trading ideas during the earnings season. This may include the sale of inflated implied volatility, a pairs trade involving two competing companies, or a trade that leverages the aftermath of the earnings move.

Today on the blog, we’re zeroing in on one particular trading approach related to corporate earnings.

Specifically, those instances when a company reports earnings and the underlying stock makes a big move during the trading day immediately following the report. For the purposes of this discussion, a "big move" equates to a stock moving up or down more than 5%.

The foundation of this trade relies upon the assumption that an earnings release represents a brief time when investors have access to almost all of the most important information relevant to a company's operations and outlook.

While this transfer of information may result in an immediate re-pricing of the underlying stock (i.e. "big move"), it also means that a theoretically "efficient market” has likely arrived at fair value for the shares.

Given that future news related to the company's operations and outlook will take time to develop (i.e. the next earnings report), that means there's a window of time in which the stock may trade in a relatively tight range.

To leverage this situation, many traders and trading firms sell premium in post-earnings names with the hope of capitalizing on this potential opportunity. This is especially true when traders have a good understanding of “the story” in the underlying stock.

A recent episode of Market Measures covers this precise topic, and we think the information contained within is worth a few moments of your time.

On the show, a study is presented that examines the historical success of selling premium in stocks that made “big moves” after earnings.

The specific position structures back-tested in the study were call and put spreads, which are defined risk structures. However, depending on your experience and risk profile, there are certainly other structures that might be used (straddles, strangles, short puts, short calls).

The parameters of the study are important and relatively easy to understand.

Using six stocks (AAPL, AMZN, FB, MSFT, NFLX, TSLA), the Market Measures team used data going back to 2005. For earnings that resulted in "big moves," a put spread was sold if the stock went down more than 5%, while a call spread was sold if the stock went up more than 5%.

In both cases, the spreads incorporated a 50 delta leg and a 10 delta leg (sold the 50 delta, purchased the 10 delta). The aggregated profit/loss results from this study are shown in the graphic below:

As you can see from the information above, fading downside moves produced more favorable results than fading upside moves. On average, selling put spreads in these six stocks after a big move resulted in positive returns.

Interestingly, the results of this study also reinforce previous tastytrade research (presented on Market Measures) that analyzed selling puts in Blue Chip stocks in the wake of a big down move (again, more than 5%).

If you think this approach fits your outlook and risk profile, we hope you'll take the time to review both aforementioned episodes of Market Measures when your schedule allows. It’s possible you might be able to add this approach to your quiver of strategies.

If you have any questions about fading big moves, or any other trading-related topic, we hope you’ll reach out at support@tastytrade.com, or leave a message in the space below.

Happy Trading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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