Things You'll Need:
- An options brokerage account
- Enough money to trade at least 2 options contracts
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Step 1
Here's a simple trading strategy that requires no fundamental or technical analysis. It's called a strangle and is most useful during earnings seasons or before a big report. The basic idea is that announcements cause an increase in the volatility of a stock. Oftentimes after an earnings report a stock will gap either up or down. This can cause the value of an option to increase for two reasons, an increase in volatility and an increase in intrinsic value.
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Step 2
The idea is that you'll purchase a put and a call before the earnings report is released. If the stock moves substantially in one direction or the other, one contract will increase more than the other contract will decrease, leaving you with a net profit. Here are a few simple rules to follow that will greatly increase your success with this simple strategy.
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Step 3
1.Find a stock that will announce earnings in the next 3 days to 1 week.
2. Make sure the stock has an average daily volume of 500,000 or more.
3. Find a stock that is trading above 10$
4. Find a stock that has gapped at least 5-10% during the last 2-3 earnings.
5. Buy a strangle (an out of the money put and an out of the money call) only buy 1 strike price out. So for example if the stock is trading at $15 you would buy the $12.50 Put and the $17.50 Call Options.
6. Buy 3 days to 1 week before earnings announcement. Buy options with at least 5-6 weeks of time left in case you need or want to hold onto them a bit after the announcement. Also options lose time faster during the last 4 weeks.
7.Use a 25% stop loss
8. Close out the trade after the announcement, or if the stock has gapped in a direction and you think it will continue that way then close out the other side of the trade and hold onto the profitable one.
