Trading earnings is a lot like going to the casino. It is really 50/50 odds that it will go your way, but you really can't help but get sucked into playing the game. Options give you a great upside to make real gains, as earnings releases usually great big volatility swings. However, how do you trade earnings so you have better EV than 50/50? How does one risk buying options and paying the premium, but still have upside if the earnings go the opposite way? Well I will break down my strategy for the latest earnings, how it turned out, and then given today's CDC nightmare mask mandates, how I kept hedging.
First, last week I legged into two sides of Tsla. Most analyst consent was calling for earnings that would cause a 7% move to the upside. So around last week Tsla was trading in a 650-660 range coming into the earnings release on Monday. Given the current market price, and calculating a 7% move either way. So that would give us ~45-50 point move up or down. Wanting to give myself some room for error, adding another deviation move, and then projecting possible increase moves after earnings are released, I legged into the following
Sold Puts as a long Position: Strikes 490, 500, 520
Sold Calls as a short Position: Strikes 750, 730
This let me a baseline position that would net me 3-4k on theta alone as long as the trading range didn't break out. Lately, tech earnings have been beating, but haven't led to too many positive increases. However, given that on Monday, Tsla was gaining a lot of momentum, and I had more contracts on my short side, I decided to do a slight hedge and bought calls at a 700 strike. This would still give me room to make money on all my positions if the stock traded above 707 and below the 730/750 range and well as win on all my put plays.
This made me sleep well at night and looked like the call hedge was right in after and pre market hours. However, at open all the gain was wiped, and with the market sentiment, I quickly flipped into more shorts. I kep my 700 call as a hedge, especially since most of the value had been eroded, and sold more calls at 715,705, and 710 strikes. This turned out well has TSLA kept tanking and I was able to gain my premium value back on the call I bought, while still being hedged, and now I still have a 7% + move remaining on both the short and long sides for the rest of the week , all while gaining more money on no moves with theta.
I will continue to play around the position the rest of the week, but this is just small insight into how I adjust trades and prepare for large moves when earnings come around.