The stock market presents traders with opportunities every day.
Some are more obvious than others, as press releases can put the spotlight on certain stocks and impact shares before or after the market is open.
Of course, news is also released during the day. But unless you are glued to a screen and have a quick-trigger finger, you will most likely miss out on any significant moves the news creates.
Some market participants can move in milliseconds… so even if you’re able to act in seconds, you’ll be far behind.
We live in an age of lightning-fast connections and machine technology that trades using complex algorithms. Emotion and judgment do not cloud the actions of a supercomputer.
But one instance offers you as close to a level playing field as you can get. This occurs when a company reports its earnings.
Companies release earnings either after the markets close or before they open. Sure, you can play the stock in the aftermarket or the premarket, but you can’t play options then.
The options market tells you ahead of time what the investing community – including those multimillion-dollar computers and highly paid algorithmic formula creators – thinks the numbers will be and how a stock will react when the market opens.
Is it perfect? No.
But it’s as close as you’re ever going to get to a level playing field.
Here’s the catch…
First, the reaction to earnings reports is not always accurately indicated by the options market.
Second, you may know the size of the reaction to the earnings report ahead of time, but you are not going to know the direction.
So, today, let’s focus first on calculating the reaction.
The reaction is called implied volatility. It measures the implied percentage move in the stock after the release of earnings. That implied move can be immediate, or it can build over a period of hours or even days.
Luckily for you, there is a quick formula to calculate this…
Take a look at the stock price and choose the options that have the closest expiration and the closest strike price to where the stock is trading. Do that for both put and call options.
Then add up the price of the put and the call, and divide that number into the current share price. That gives you a percentage approximating the move expected by the market.
As an example, take stock “X”…
Assume the shares for stock X are trading at $20. You look up the options chain and see that there are weekly options. The $20 call option is trading for $1.20, and the $20 put options are trading for $1.00. That is $2.20 in total. Divide $2.20 by $20, and you get 11%.
That is the expected move for the shares. It’s that simple.
Now, that 11% doesn’t give you the direction of the shares. It just gives you the expected move.
But in tomorrow’s Trade of the Day I’ll show you how to play that expected move!
Action Plan: In The War Room, we use these formulas, along with research and other proprietary indicators, to give members the best possible chance at making blowout profits when earnings are being released.
Our profits have been phenomenal at times. And there are a slew of releases coming up soon. Find out how you can participate and trade with me and other professional traders in real time in The War Room!
[adzerk-get-ad zone="245143" size="4"]About Karim Rahemtulla
Karim began his trading career early… very early. While attending boarding school in England, he recognized the value of the homemade snacks his mom sent him every semester and sold them for a profit to his fellow classmates, who were trying to avoid the horrendous British food they were served.
He then graduated to stocks and options, becoming one of the youngest chief financial officers of a brokerage and trading firm that cleared through Bear Stearns in the late 1980s. There, he learned trading skills from veterans of the business. They had already made their mistakes, and he recognized the value of the strategies they were using late in their careers.
As co-founder and chief options strategist for the groundbreaking publication Wall Street Daily, Karim turned to long-term equity anticipation securities (LEAPS) and put-selling strategies to help members capture gains. After that, he honed his strategies for readers of Automatic Trading Millionaire, where he didn’t record a single realized loss on 37 recommendations over an 18-month period.
While even he admits that record is not the norm, it showcases the effectiveness of a sound trading strategy.
His focus is on “smart” trading. Using volatility and proprietary probability modeling as his guideposts, he makes investments where risk and reward are defined ahead of time.
Today, Karim is all about lowering risk while enhancing returns using strategies such as LEAPS trading, spread trading, put selling and, of course, small cap investing. His background as the head of The Supper Club gives him unique insight into low-market-cap companies, and he brings that experience into the daily chats of The War Room.
Karim has more than 30 years of experience in options trading and international markets, and he is the author of the bestselling book Where in the World Should I Invest?
