Last earnings season started off with a bang for Earnings Trader members, thanks to a trade on Tesla (NASDAQ: TSLA) that returned a profit in less than a day.
With TSLA scheduled to report earnings after the bell on April 24, we were looking at a pre-earnings trade. That’s because TSLA options were pricing in a post-earnings move that was larger than the stock’s historical average during the previous four years.
In fact, option prices predicted a 7.7% move compared to the 6.3% historical change. That suggested that TSLA options were likely overpriced heading into earnings.
And there’s nothing we love more than selling overpriced options.
The Volatility Crush
We also knew that TSLA is known for sizeable implied volatility (IV) declines – known as a “volatility crush” – following earnings. For example, the previous quarter IV dropped from 84% to 54% in just one week. That kind of volatility crush tends to pull premium out of options, which is what we want as option sellers.
With our earnings trading criteria lined up, we recommended a neutral iron condor on TSLA right on the day of earnings (April 24). With the stock at 260, we sold a 17 May 230/225 put and 295/300 call iron condor for $1.70, or $170 per spread. Because of elevated IV and inflated option prices, we collected about a third of the width of the spread even though the sold 230 put and 295 call were about 12% out of the money.
That night, TSLA’s report badly missed expectations on both earnings and revenue. But the stock fell less than 2% the next morning, far less than what option prices had predicted.
What’s more, IV dropped from 72% to 59% within the first hour of trading. That “crush,” along with the small price reaction, pulled premium from our iron condor, allowing us to collect around 30% of the initial credit on a trade open for less than a day. We told subscribers to buy back the spread that morning for $1.20, a $0.50 gain.
The bottom line is that we scored a 15% profit on a trade open for less than one day. With a $50,000 account and a 5% allocation, that equates to a profit of $350. That’s what we call a “quick hitter” profit that we love to find during earnings season.
I can’t wait for the next season to start!
There is a right way to trade earnings reports with the “Earnings Volatility Crush.” Get Instant Access to My Free Report: 10 Stocks That “Crush It” During Earnings Season.
About The Author
Meet Jon Lewis, With over 20 years of real experience, teaching AND trading, Jon will help you learn to use options profitably and safely in portfolios of any size.
His advantage, and now yours, is using simple, often overlooked spread options strategies which generate consistent income without significant risk.