Papale on Earnings

One of my kids loves limes.  I am not sure where he got this taste but whenever he can he will slice the thing up and eat it.  We hold him back a bit as we were told the acid is not good for the teeth.  Well, the lime market it seems has gone parabolic over the last year or so with prices doubling.  Heavy rain and disease has limited the crop and hence the supply.  So son I hate to break it to you but your days of munching on limes are over for now.  Looks like you have to go back to plain old candy.

It seems like we are in a perpetual earnings season.  After the end of one quarter of reporting the next quarter starts.  Playing the earnings is a popular option trade.  There are basically two different ways to play earnings.  One is to play the expected move in implied volatility heading to the earnings day.  In most stocks, IV goes up as we head to the earnings announcement date.  Many traders get long vega and ride it up to the earnings date.  Often before the date of the earnings is released they sell out of the positions.  If IV goes up enough they can profit without having to be exposed to the earnings itself.

The other approach is to have positions in the market to take advantage of the earnings release itself.  In nearly all cases, IV falls once earnings are released.  The real question becomes how much will the stock move.  There are a number of strategies a trader can use to take a position on both vega and stock direction.  The trader just needs to determine his expectation and structure the trade accordingly.  And of course don’t forget to manage risk.

Comments are closed