We are in the heart of earnings season. This week, about one third of the companies in the S&P 500 will report their earnings. Each announcement is a binary event that provides us with an opportunity to sell high Implied Volatility (IV). Is this something that can be done in a tastyBITE-sized account and if so, what is the best way to do it?
Normally we would look to undefined risk trades when selling option premium. The problem for smaller accounts is that the margin on naked options too severely limits the number of trades we can make. That means that what we call the Law of Large Numbers may not work for us since our number of occurrences won’t be large enough. What this means that instead of selling a Strangle or a Straddle smaller accounts have to use an Iron Condor or an Iron Fly.
A table laid out 3 different trade concepts. The first was an Iron Fly with wings $5 out. The other two were Iron Condors with $5 wings, one collecting 50% of the wings or 2.50 in credit and the other about a third, or 1.65. The table also included the risk/reward for each. The more risk we take relative to the reward the higher will be our Probability Of Profit (POP). We can also increase our POP by choosing a skewed Iron Condor instead. This was demonstrated graphically using side by side charts using NFLX as the underlying. We also need to pay attention to the size of the expected move. Things to keep in mind both for a larger expected move and a smaller expected move were listed and explained.
For more on Trading Earnings see:
Market Measures from March 26, 2015: " Earnings | Directional Play"
Market Measures from July 24, 2015: "Earnings | After The Announcement"
Watch this segment of tasty BITES with Tom Sosnoff and Tony Battista for the important takeaways and better understanding of how and why a trader with a tastyBITE-sized account should trade earnings.
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