How do you teach traders to swing overnight when $GOOGL, $AMZN, $INTC, and $MSFT are all coming out with earnings? You would have to gamble.
We could guess or hope they beat expectations which would send their stocks soaring. Or we can guess they’ll miss and their stock price will plummet.
Unless you have inside information, that would be a 50/50 gamble. Not the kind of odds that I want to take as a trader.
Even though I go to Vegas twice a year to present at the Traders Expo/MoneyShow, I’m not a gambler.
The only reason I was in the stale, smoky casino was because it was the only way to get to the convention hall. You must walk through the flashing slot machines to get anywhere in Vegas. They even have them in the airports right by your gate.
During my recent master swing boot camp class. My traders needed some help. After studying all the rules all week long, they were ready for our overnight trading challenge.
This challenge wasn’t going to be easy with two of the biggest Nasdaq stocks $AMZN and $GOOGL due to report earnings after the bell. Even though $INTC and $MSFT are in the Dow 30, they are still considered tech heavy stocks. The Nasdaq, the $QQQ was due for huge move, but the million-dollar question was, which way?
One of my biggest rules is not to hold a stock into earnings. Our best trades are trading the pre-momentum volatility before and post-momentum after they report. To hold a stock into an earnings report is gambling. Even though earnings may be good, the stock could already have incorporated that into its stock price.
Stocks may move down afterwards. Many times, bad reports, where companies don’t meet the analysts’ expectations will have bullish price action due to a positive outlook. Analysts can make the worst traders if they try to predict how a stock will react after earnings come out.
The best advice I can give you is to ignore the numbers and read the tape. My favorite earnings trades are when they reverse from negative to positive and vice versa.
Even though my swing class primarily focuses on how to enter and exit stocks, this option trade clearly presented itself as the best way to trade into this challenging high-tech earnings announcement after the bell. We were certain that the $QQQ, the Nasdaq ETF was going to have a big move.
We just didn’t know if was going to be up or down. Trading options on $GOOGL or $AMZN into earnings could be suicidal due to the inflated volatility. That’s how the options protect themselves making it extremely difficult for us traders to make money trading them. They inflate the prices to adjust to any big moves that may happen during earnings.
Our only option was to trade options on the actual $QQQ. The best part of this trade was that these companies were reporting on Thursday after the market close. We could buy some very inexpensive options on the $QQQ that were due to expire the next day.
We wouldn’t be paying for time on these, which is why they were so cheap. We call them lottery tickets. Lottery ticket plays are my favorite, when we are expecting a huge move. They usually cost anywhere between .04-.20. We’re risking a very small amount on this trade which would be like buying a $20 lottery ticket for the Powerball at Seven Eleven.
I explained to our traders that our best strategy into earnings would be to do a long strangle on the $QQQ overnight.
We would only make money if the $QQQ’s moved up or down a few dollars. The odds were in our favor of a big move due to these powerhouse earnings coming out. The only way we could lose on this trade was if nothing big happened. In that case, we would only lose a few dollars. For those of you who are not familiar with what a strangle is, here is a quick definition.
The long strangle, also known as buy strangle or simply “strangle“, is a neutral strategy in options trading that involve the simultaneous buying of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date.
Here is the daily chart of the $QQQ. Note that the $QQQ closed at $146.96 on October 26th, 2017.
You could see on this chart the $QQQ recently peaked at $149 before it pulled back down to the $147 area. Looking at the chart we spotted that the next leg down of support for the $QQQ’s was around $144 and resistance was at $149.
The best way to put on a very low risk high reward trade would be to go $2-$3 out of the money on both sides of the strangle. Since the $QQQ’s closed around $147, a few of my traders bought $148 and $149 calls and the $144 and $145 puts.
I bought one contract of each of these as part of my lesson plan to show the traders in the class how the price action would reflect the option movement the following day. Some of the traders in the class loved this trade jumping in buying 75-100 contracts. Here are their actual trades they called out in class.
At 3:23 ET, Vinny put on a long strangle on the QQQ’s buying 100 contracts of the 144 puts for .07 and 100 contracts of the 149 calls for .06 October 27th expiration.
Bryan B also jumped into this trade buying 70 contracts of the $145 puts and 85 contracts of the $149 calls.
Jim aka The Rockstar also took this trade buying 5 contracts of each. He bought the 148 calls for .22 and the 146 puts for .25. He paid a little more going closer to ITM (In the money).
Our trade paid off big time the next morning. $GOOGL gapped up from $991 to $1030 but ran all the way up to $1063. $AMZN also gapped up from $972-1050 and ran all the way up to $1105. $MSFT and $INTC also went up bigtime.
Our calls went from OTM (Out of the money into ITM into the money). Look at this screen shot of the one contract I bought for just .06. It exploded to $1.97. A $6 risk yielded $191. That is over 2000% ROI. That is like winning the jackpot. The 144 puts went from .07 to zero, losing $7.
At 12.14 pm I exited this trade when I saw a huge Dark Pool print come in on the $QQQ.
Look at this next picture. You can see a million-share trade got executed at $151.05.
Here is the chart of the $QQQ from Friday October 27th.
It had a huge move. The strangle really paid off. I didn’t peg the top; the calls moved up a little higher into the $2 range. Look at the Level 2.
Keep in mind my students bought more than one contract. It was an earnings Powerball. I only teach this online Boot camp workshop four times a year. We keep this class small so that you can get a lot of individual attention. It’s fifty hours of online live trading where I personally teach everything I know.
It covers day trading, short term overnight momentum swing trading and longer-term investing. I share my screen all day long while I walk you through all the trades. You’ll learn how to enter and exit in real time. This class focuses on how to follow the smart money, trading around the dark pool, using various forms of technical analysis. I’ll teach you how to map out low risk, high probability trades all day long.
My next class starts January 8th, 2018. For more details, you can go to our website and read more about it. You can also Sign up for my mailing list and receive weekly coupon codes on all my workshops.
Until next time,
The Stock Whisperer