Earnings Season Preview -
As we begin earnings season, our team at The OptionWiz looks to Exchange Traded Funds to mitigate some of the risk that Individual stocks carry during this period.
Making a call on which way a security is going to move following quarterly earnings is a risky game. Therefore, we suggest taking a broader stance on investment decisions during this period, trading ETFs.
There are many ways to play earnings & ETFs. One way we like to participate is to determine whether or not a stock is going to have a substantial move in the days surrounding its quarterly report.
Example:
Google is reporting earnings on Thursday and while we don’t have a good handle as to whether it will go up or down (based on the report), we can trade a technology ETF and wrap an options strategy around it.
We do believe that Google’s number will move the tech sector. Therefore, we will trade XLK (Amex Spdr Technolody Select Index).
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EXAMPLE TRADE
Stock / Symbol: AMEX SPDR Technology Select Index / XLK
Price at trade: $29.53
Option Strategy: iron condor
Reasoning: This trade is designed to profit with at least a 4% move up or down in the XLK from it’s current price by May expiration (5/18). If we haven’t moved beyond the breakeven points in the trade by the first of May, we’ll exit the trade to protect against further losses.
Risk Profile:
Max Risk: $590
Max Reward: $410 or 69% @ $0 to $28 or $31 + by May 18
Profit Range: $0 to $28.40 and $30.60 +
Suggested Stop: if not in profit range by May 1st, exit trade.
Trade Details:
BTO 10 XLK May12 30 call
STO -10 XLK May12 32 call
BTO 10 XLK May12 29 put
STO -10 XLK May12 28 put
for a net debit of $0.59 per contract (day order, limit order. Don't pay more than 64c for this spread)
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Did You Know
There are currently $1.4 trillion dollars in ETF’s worldwide and $954 billion of that is in U.S.-based funds. The overall market for Stock, bond and commodity markets worldwide is estimated to be $130 trillion dollars, with traditional stock and bond funds representing only $9 trillion of the total.
We use ETF’s to hedge our portfolio, make sector calls, and avoid individual stock blow-ups.
PROS
- No need to be an individual stock picker
- Don’t need to worry about earnings (although a big company that is about to report earnings in a particular sector which you have purchased an ETF could potentially move the ETF)
- Great hedging vehicles
- Safety of a mutual fund without the expense
CONS
- ETF’s will underperform some individual stocks
- 3x ETF’s are highly volatile
- Some ETF’s do not correlate to their underlying assets as perceived
Trade Smart,
The Wiz
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