Markus Heitkoetter
Rockwell Trading
At the time of writing this article, we’re deep into the middle of earnings season. Lately, I’ve been working on an earnings strategy and I wanted to share it with you today. This article focuses on a question that many traders ask:
How can I develop a profitable trading strategy?
To answer this question, we’re going to look at a strategy I’m currently developing, and how I’m doing it.
I’ve been working on this specific strategy because I know that earnings seasons provides a unique opportunity to make money.
The concept behind this strategy is selling options premium around earnings. This type of strategy is also known as a strangle.
Around earnings, the implied volatility increases, also increasing the options’ premium.
The goal is to sell premium for the inflated amount before the earnings announcement.
In a strangle, you are both selling a call option and a put option, ‘strangling’ price between it.
The idea is that after a company announces it’s earnings report, the IV in the options gets crushed…this is how we make money with this strategy.
This basically means that the premium in the options evaporates. Since premiums were higher when the options were sold, I can now buy them back at a reduced rate.
So to make money with this strategy, you need the price of the underlying asset to be trading between the strikes you sold at the time of expiration.
Testing this strategy On Wal-Mart (WMT)
In this trade example, I’m going to trade a strangle around Wal-Mart’s earnings. With this specific trade, I’m going to sell a call $10 above the strike price and a put $10 below the strike price.
Wal-Mart is currently trading at $128. I will sell the $138 call and the $117. I will have a profit target of 70% for this trade.
It’s important that you establish a profit target, with entry and exit points. This type of trade should be monitored closely.
I’ve traded this strategy 8 times now, and every time it has worked like a charm! This strategy works well with stable stocks that don’t move a bunch around earnings.
Most people have this idea that all stocks are super volatile around earnings when in reality, the vast majority barely move at all. This is exactly what we’re looking to take advantage of.
As part of my testing method, I like to trade a strategy around 40 times to determine whether it is profitable over a longer period of time.
Using tools to test your strategy
I’ve spent some time developing a tool that I like to call the “Earnings Strangle Calculator.”
I use this tool in several different ways. When I develop any trading strategy, I always include how much I’m willing to lose/risk on every single trade.
This tool calculates the size of the position you can take based on your account value and the price of the option. You can also use this tool to compare option trades.
Tools play an important role in all of my trading strategies. Not only do they save me time, they help to keep my consistent and disciplined.
How YOU can develop a profitable trading strategy!
When developing your own trading strategy, it’s important to use the same criteria for each trade. Don’t start things off one way, then change if things aren’t working midway through.
This ensures you’re testing will result in accurate data. Also, testing your strategy multiple times is very important. As I mentioned, I often test a strategy around 40 times to ensure that I have enough data to be statistically relevant and determine whether the strategy is actually profitable.
This number can vary depending on the market conditions and the type of strategy.
When developing a strategy it’s important to not only find one that’s profitable, but also matches your lifestyle and risk tolerance.
Recap
- Find a trading idea that you think will work for your style.
- Set up rules or criteria to test your trade.
- Find tools to help you with the process.
- Test your strategy many times over a period of time.
Using this information, anyone can develop a profitable trading strategy over time. Developing a new trading strategy takes patience and time.
Trading Futures, options on futures and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. The lower the day trade margin, the higher the leverage and riskier the trade. Leverage can work for you as well as against you; it magnifies gains as well as losses. Past performance is not necessarily indicative of future results.
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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