Tech sunk this morning, dragging down the general market after Snap Inc (NYSE: SNAP) reported earnings last night. The Nasdaq Composite and S&P tumbled through noon as the Dow traded flat.
SNAP shares, meanwhile, crashed a whopping 38%, bringing the broader tech rally to a screeching halt. The company missed on EPS (-$0.02 reported vs. -$0.01 expected) and revenue ($1.11 billion reported vs. $1.14 billion expected).
But the biggest disappointment came when the social media platform removed guidance for Q3.
“Forward-looking visibility remains incredibly challenging,” the company said in its letter to investors before adding that Q3 revenue thus far is “approximately flat” compared to Q3 2021. Analysts predicted sales growth of 18% by comparison.
Snap Inc also said that it would reduce hiring in anticipation of slowed revenue growth.
“We are not satisfied with the results we are delivering, regardless of the current headwinds,” the company explained.
Wall Street was quick to chastise SNAP for its bad quarter.
“Snap has managed to snap the uptrend in the Nasdaq by reporting disappointing earnings, which has created a cascading effect on the S&P,” said CFRA Research chief investment strategist Sam Stovall.
“This is just an example of the volatility that investors should expect as earnings are reported, and, therefore, could cause fluctuations in prices in response to better than or worse than results.”
With more “earnings bombs” likely on their way from America’s top stocks, investors may want to consider using an options trading strategy that profits off big moves.
I’m talking about straddles/strangles.
Straddles and strangles allow you to actually profit off of a stock’s movement as long as it moves enough, regardless of direction. These strategies are only profitable when the price of a stock moves a significant amount (either up or down), so the important thing to focus on is finding stocks that really move after earnings.
SNAP gives us a great example of why this works so well. This morning, SNAP shares sunk 38%. Back on February 4th, SNAP soared 58% in response to earnings in a single trading session. The earnings report before that saw SNAP plummet 26% on October 22nd, 2021.
If you would have researched SNAP’s past post-earnings performance, you would have known that this stock loves to make big day-after-earnings moves. With that information, you could have used an options straddle or strangle to capture some relatively easy profits.
But finding desirable stocks to trade is half the battle. What you also need to know is when to enter trades and what strategies to use.
When to Enter Earnings Plays
Because an option’s premium will rise significantly in anticipation of an upcoming earnings report, traders can get a better deal on them by entering positions one to six weeks prior to the earnings report. Your funds will be locked up in the options until earnings are announced, but it’s the trade-off you make to avoid the extremely high premiums that build up in the days before an earnings report. This is due to the potential for increased volatility once earnings are announced.
So, once you’ve picked a stock that has an earnings report in one to six weeks, you then need to decide which strategy you’ll use – a straddle or a strangle. Both strategies enjoy unlimited upside with limited risk and are different avenues that allow you to achieve the same goal.
Strategy 1: The Long Straddle
This options trading strategy involves buying a call option and a put option with the same strike price and expiration month. In addition, the strike price of the options must be at-the-money. So, when you select your options, try to pick ones with strike prices closest to the price of the underlying security. For example, if the price of the underlying stock was $34, you’d want to pick the 35 strike price call and put.
As long as the stock “pops” enough following an earnings report, this strategy will put you in a profitable position.
Strategy 2: The Long Strangle
The long strangle has the same goal as the long straddle, which is to profit off a stock’s volatile movement in either direction – but it works slightly differently.
Instead of buying options at the same strike price, a strangle involves buying an out-of-the-money call and put, at strike prices that are near (but not at) the underlying security’s price.
For example, if an underlying stock was trading at $30, and the two closest strike prices (that aren’t 30) are 25 and 35, you would buy a 25 strike price put and a 35 strike price call.
So, let’s say you’ve bought a long straddle in advance of an earnings report, the stock “pops” like you wanted it to, and now you’re in a profitable position – the question many traders then ask is:
“What am I supposed to do from here”
Sadly, unlike playing earnings reports via options trading strategies, responsibly trading a stock post-earnings is a bit more complicated, and requires a sound trading method – something that we offer to our premium members.
And though knowing how to play earnings won’t make you an overnight millionaire, it does give you a tool that allows you to find the low-hanging fruit when earnings season rolls around every quarter, especially during “critical” earnings seasons like the one we’re currently in.