Earnings announcements give traders an opportunity to find alpha related to a company's financial quarterly reporting. Some stocks exhibit predictable patterns around earnings releases that, if understood, allow traders to uncover trades with a high-probability of success.
Each quarter, the Delphian team backtests the eight strategies below and provides an earnings plan for all customers. The plan is published each quarter at the start of earnings season and provides real-time trade alerts for all high probability trades.
During the lead up to an earnings release institutions anticipate strong results for some companies so they accumulate stock for their funds. Delphian calls this strategy a Bullish Pre-Runner and based on historical analysis, the price run-ups typically start 5-20 days before earnings.
The bullish pre-runner strategy tries to capture a 25-50% gain for a bull put spread within the 20-day window prior to earnings. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or the day prior to the earnings release.
Institutions expect some stocks to have a selloff after an anticipated negative earnings report. This leads to the selling of their positions prior to the earnings announcement which will drive down the price. Delphian calls this strategy a Bearish Pre-Runner and based on historical analysis, the price drops typically start 5-20 days before earnings.
The bearish pre-runner strategy tries to capture a 25-50% gain for a bear call spread within the 20-day window prior to earnings. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or the day prior to the earnings release.
For some company’s earnings reports, the market is preparing for a large stock price change either bullish or bearish after the earnings announcement. This anticipation leads traders to purchase options before the earnings announcement which pushes the option premiums and implied volatility higher for that stock. Delphian calls this strategy a Volatility Rise (Vol Rise) and based off of testing, the option premium run-ups typically start within 2 weeks of the earnings announcement.
A Vol Rise is designed to capture a 15-30% gain for a long strangle. The trade is designed to profit from an increase in volatility before the earnings announcement. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or the day prior to the earnings release.
Some company’s earnings reports consistently produce large stock price changes in either a bullish or bearish direction after the earnings announcement. The stock price movement for some of these companies exceed what the market makers are anticipating which presents a trading opportunity. Delphian calls this strategy a Price Mover and based on historical analysis, the price swings can start 1-10 days before earnings.
A Price Mover is designed to capture a 15-30% gain for a long strangle. The trade is designed to profit on a large rise or drop in price before or immediately after earnings. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or the day after the earnings release.
Price mover trades are fairly simple to execute however they are very difficult to find because market makers factor in the expected moves very accurately. Always test the trade historically prior to executing a live trade to help prevent losses.
Some company’s earnings reports consistently produce small stock price changes after their earnings announcement. The price movement historically falls below what the market makers are anticipating, presenting a trading opportunity.
A Price Non-Mover is designed to capture a 15-30% gain for an Iron Butterfly spread. The trade is designed to profit on the lack of movement in price immediately after earnings. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or the day after the earnings release.
The Iron Butterfly is a four-legged option spread and the short options are at the money. After the earnings announcement either the short calls or short puts will be in the money so there is a possibility of being assigned the in the money short options as the expiration date draws close.
After a company reports earnings the stock price will move in one direction or the other and there will be a sharp drop in implied volatility that triggers a similarly steep decline in an option's price. The expectations (expected move) for a big stock move were being priced into the options ahead of the earnings report via volatility premiums and after the results are announced that volatility is quickly removed. Delphian calls this strategy a Volatility Crush (Vol Crush) and based on historical analysis, the volatility premiums are the highest the day before the earnings announcement.
A Vol Crush is designed to capture a 15-30% gain for an Iron Butterfly spread. The trade is designed to profit from a decrease in volatility and option premiums immediately after the earnings announcement. Trades used in this model should be exited the trading day after the earnings release. The trade is closed when any of the following conditions are met: profit target is met or the day after the earnings release.
The Iron Butterfly is a four-legged option spread and the short options are at the money. After the earnings announcement either the short calls or short puts will be in the money so there is a possibility of being assigned the in the money short options as the expiration date draws close.
Institutions expect some stocks to have a large price increase after a positive earnings report leading to major buying pressure immediately after the earnings announcement which will push the price higher. Delphian calls this strategy a Bullish Runner and based on historical analysis, the price typically increases from 1-20 days after earnings.
The bullish runner strategy tries to capture a 25-50% gain for a bull put spread within the 20-day window after the earnings announcement. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or a time stop for 20 days after the earnings release.
Institutions expect some stocks to have a large selloff after a negative earnings report leading to major selling pressure right after the earnings announcement which will drive down the price. Delphian calls this strategy a Bearish Runner and based on historical analysis, the price typically drops from 1-20 days after earnings.
The bearish runner strategy tries to capture a 25-50% gain for a bear call spread within the 20-day window after the earnings announcement. The trade is closed when any of the following conditions are met: profit target is met, stop-loss is met or a time stop for 20 days after the earnings release.
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