How To Profit Off Of Bad Earnings

| October 24, 2014 | 0 Comments

optionsIt’s earning season, so you know what that means… lots of big moves in individual equities. And this time around, there’s added volatility in the market due to the recent selloff. It seems like earnings misses are causing larger than normal downward gaps.

As options traders, we know big moves can be very good if you have the right trade on. However, predicting earnings misses and downward gaps is never an easy task. Even the pros hardly get it right.

Fortunately, there’s a better way to profit off this scenario.

Here’s the thing…

Options give us the ability to make savvy trades AFTER an earnings miss.

You see, it’s pretty common for a stock to get oversold after it misses earnings. Especially in a more volatile environment (like we’re in now), investors are quick to dump companies with any sign of weakness. They’re all too happy to pull the trigger.

Now, you may be thinking you could just buy the stock outright in that case. Sure, that could work. Or, you could buy calls and hope for a rebound. That may also work out.

However, these methods may be flawed. Of course, we know the advantages of options over stocks. But what about long calls? Why not use them?

The problem with long options is timing can be difficult. You either have to pay up for time value, or gamble on a quick move. Sometimes, on an earnings miss, the rebound may not occur quickly enough for long options.

That’s why it makes sense to sell puts instead.

With a put sale, you aren’t betting on a big rebound, you’re just betting the stock is done selling off sharply. That’s a much easier bet to make, with the odds in your favor. And perhaps more importantly, you’ll be taking advantage of the extreme volatility.

When a stock gaps down, volatility shoots higher. It allows traders a chance to sell very expensive puts.   And, as soon as the stock stops falling, that volatility vanishes. Your short puts will be winners almost immediately.

Now, selling puts isn’t for everyone. Plus, you have to have a margin account. But, if your account is set up for option selling and you’re willing to take on the risk, earnings season is a great time to profit off of put selling.

Yours in Profit,

Gordon Lewis

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Category: Breaking News

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.