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The Wonderful Secret Behind Options Earnings Trading in Twitter Inc (NYSE:TWTR)



Discovering Volatility in Twitter Inc

Twitter Inc (NYSE:TWTR) : The Wonderful Secret Behind Options Earnings Trading

Date Published:

Preface
There is a wonderful secret to trading options right before earnings announcements in Twitter Inc (NYSE:TWTR) , and really many stocks, that benefits from the rising implied volatility but avoids the risk into the actual earnings release and also avoids any kind of stock direction risk.

This approach has returned 23.7% with a total holding period of just 40 days, or a annualized rate of 216%. Now that's worth looking into and remembering for the next earnings release in a few months.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. This can be explicitly seen in the option market, where the implied volatility (the expected stock move) rises into the earnings event.

Here is a great illustration of that reality using Google, just as as simple example, and a chart of its 30-day implied volatility over the last two-years, before we turn to Twitter Inc . While the implied volatility ebbs and flows, it generally rises into earnings, which are denoted in the chart below with the "E" icon. We circled the rise in yellow for convenience.



The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies, the answer is actually, yes.

THE WONDERFUL SECRET
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, is two-fold:

(i) to be to benefit from that known implied volatility rise.
(ii) to own the straddle for a very short period of time when the stock might move 'a lot.'

If either of those two phenomena occur, there's a very good chance this wins, if neither occur, the amount risked is normally quite small.

Here is the setup:



We are testing opening the position 6 days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.

Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:

RETURNS
If we did this long at-the-money (also called '50-delta') straddle in Twitter Inc (NYSE:TWTR) over the last two-years but only held it before earnings we get these results:



We see a 23.7% return, testing this over the last 8 earnings dates in Twitter Inc. That's a total of just 40 days (5 days for each earnings date, over 8 earnings dates). That's a annualized rate of 216%.

We can also see that this strategy hasn't been a winner all the time, rather it has won 3 times and lost 5 times, for a 37% win-rate and again, that 23.7% return in less than two-full months of trading.

WHAT HAPPENED
This is it -- this is how people profit from the option market -- it's preparation, not luck.

To see how to do this for any stock and for any strategy with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.

Past performance is not an indication of future results.

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

The author has no position in Twitter Inc stock as of this writing.

Back-test Link (requires custom earnings set-up).