174: How To Trade Earnings Using Earnings-Watcher.com

(upbeat music) Welcome back to the Stock Market Option Trading Podcast. I'm your host, Eric Rort. Now, I know I talk a lot about trading options on the S&P 500, mostly SPX, but do you know what one of the biggest drivers of the index actually is? It's actually earnings, as you probably know. And an earnings season is just about to kick off. So I thought it'd be fun to sit down with someone who actively trades earnings. And in this episode, I chat with Dan about a tool he uses called earnings watcher. Now, we're gonna cover the basics of volatility around earnings, as I'm sure you already aware of. And we're gonna talk about how earnings watcher helps you stay organized and can help analyze historical price movement and behavior for stocks around earnings events. Now, after listening, if it peaks your interest, you wanna learn more about trading earnings, head over to earnings-watcher.com to learn more. And if you decide to join their website, use the code SMOT SMOTE to let them know that I sent you and they're gonna offer a little discount for you. It's very generous over there at earnings-watcher.com. All right, now let's get into my conversation with Dan and we're starting right now. All right, Dan, welcome to the show. I'm glad to have you on today to talk about earnings. This is something that a lot of people want to trade. I've tried to trade it with, I never really felt confident in my earnings trading, but this tool is very intriguing. So, first welcome to the show and how are you doing today? - Hello, Eric, I'm happy to be here. I'm wonderful and I've been looking forward to our meeting and I'm talking about earnings because I believe earnings is one of the, as you said, most misunderstood strategies that you can do with options and using earnings watcher, one of the many tools, but I think maybe the best tool out there you can trade or out earnings with. - You know, I'm looking at some of the tools which we'll get into here in a minute. I know traditionally what I've learned and I'm gonna come at you today as kind of like really a basic level because it's something that I used to try to trade years ago and the general idea was sort of a wall crush and we know, I think what most traders know that listen to this show, they know as earnings come up, volatility rises because there's kind of some uncertainty about what the stock's gonna do and then once the news is out and there's a little bit more certainty, the volatility crushes and a lot of people will just try to sell options, hoping that the stock doesn't move farther than the expectation, but I just remember specifically looking at trades like that around and I just remember Netflix back in the day when Netflix used to rise 100% every other year or whatever it was, it was an insane run that Netflix had and I just know I didn't do it, but I know so many, I would see so many traders just get blown out and it kind of, you know, it just made me nervous to put on this one trade that only happens four times a year and it's not as, for me it was harder to be consistent in earnings trading with a process or a system if you will. So talk to me a little bit about how earnings watcher can help with the IV crush trade, let's start there, but also there's some other tools there that will get into that are sort of different way to approach it. So what are your thoughts on the IV crush element and how earnings watcher can kind of maybe help you get organized with that type of trade? - Yeah, that's a great start, Eric. Basically, the old crash is one of the very certain things which will happen that's nearly as certain as death. It always happens because we have the IV ramp before, we had a lot of uncertainty before the earnings event and then volatility goes down, but which is the stock you should choose to do that. This is the big question like you said, trade it Netflix a lot of times. Yes, I got burned once or twice, but mostly I've made lifetime fees for Netflix, I think for 50 or 60 lives, (laughs) so I can watch Netflix even if I'm reborn. How can earnings watcher help you here? Because you should know before the earnings event happens, let's stay with Netflix, let's say Netflix had earnings tomorrow. In the last two weeks, the options will get richer and richer and richer. What is rising, it's not the price, it's volatility, which is rising and after the earnings come out, all the uncertainties out and we have a move of price, but what do we have volatility and deflates? There are certain rates which are calculated, how big the IV crushes and so on, we don't need to deep dive into that, but what you know is that the options which you might have sold if you choose to do a short volatility trade, you sell expensive options before the earnings event and believe that only the IV crush alone and the deflation in the whole price of the option will be enough to offset the risk. So we should come to one basic thing and this is where earnings watcher come in. We can look at historical data and we can see how things shift like you said. Netflix was a clear long vote trade for many years because it always used to blow the implied move. What is the implied move? It's very simple for each earnings expiration there is the expected move. Simple thing is to take the straddle, it's not very accurate and put these things together. So let's say Netflix would be, I don't know, at 500 dollars until the end of the week, which is tomorrow, we would believe that it would move 100 points 50 up or 50 down. So if we would sell a short volatility trade, we would sell outside of this implied. As you said many years back, this was blown out regularly so the market mispriced that and that's why a lot of people lost money there and can deep dive how earnings watcher can help here. Yeah, and so one of the tools you guys have on there is called the Moves Analyzer. So tell me a little bit about how that works so you can maybe consider, if you were going to consider a trade on a certain stock that maybe you follow or something, how does that work? What type of analysis can you get out of the Moves Analyzer? Yeah, you can get all types of strategies out there. You, the best thing is always to look at the thing, look at the stock and how it has evolved. Basically, you can have data going back to 2013 then you have the last 10 years, the last five years and the last two years. What do I trade? I mainly trade the last two years because you have stocks like Netflix, which have evolved, which have changed. So this is very simple. You can see the past moves, you can see how the pre-release move has been, the day of the release, you can see how the peak, so the post-release move has been, you even see how the spy move that day where the Wix was there a duration of the move and so on. Let's say Netflix went up, did it go up and for how long and there are statistics on that. And you can basically, if you get a broad of you, what happened, like 10 years ago, five years ago, two years ago, you get a good feeling how this stock might have changed. So if, like you said, you traded earnings, let's say 10 years back, let's keep it simple. If you go 10 years back, we had an average move of 10.7%. If we just look at the last two years, we would see it just moves 9.6. You could argue this is just 1% off, roughly. But this is a lot, this is a lot because the volatility score especially goes down on the day of the release. What else do we have here? We see how was the expectation versus the reality. So we see how far have the average and the implied move been away from what has been priced in and why is that important? It is very important for us to know how far will it stay in range because if you have, let's say, a short-volt trade will take a deep dive into Netflix maybe in a couple of seconds if it is a short or a long-volt trade. Basically, the thing is that let's say you trade a short-volt rate around 10% because you saw it's 9.6 move. If it moves, let's say, 1% or 2% averagely above this implied move, then you know how much you could lose. Like you said, a lot of people blew out. Statistically, yes, we have fat tails and these are the stocks we look at for long-volt trades, like stocks which stay in range but have immense great moves. Let's say every three or two-four quarters because these are the ones we will pay for the other three ones. We have the actual versus the implied move, which is very important, so we look at just at the data. How often did the actual move beat the implied move? So we had five times out of eight, the market misprice starts, so we moved above. So let's say if we believe this was a short-volt trade, we would have lost five times and only one three times. Statistics don't look good there. So this gives us just a hint that this could be a long-volt trade. But because these things are very close and we don't see a lot of move of the expected versus the reality, one of these panels here, that's the thing that would be a stock was probably we would even avoid. And for this, there is the use AI at earnings watcher and some other proprietary algorithms that CEO has written and to filter out the really good place. Do they all win? No, but there are weekly data picks and these do well and they're even ranked. We will deep dive into that later. That's a very cool. I mean, that makes a lot of sense to me about if you're trying to play Volcrush. And so what I'm hearing you say is, and what you're showing me right now is you know, it can show you how often, I guess it's stayed in range or sort of the historical performance of that style of trade. But there's also other trades like LongVal. What are some LongVal sort of option structures you might want to consider? Obviously you can buy a straddle. But are there other structures that are maybe a little bit, I feel like that's probably not cost-effective to just simply buy a straddle with a couple days to expiration or whatever it happens to be. Are there other LongVal structures you guys recommend or you see that maybe you trade or what are some other ways to play LongVal? If you're expecting the stock to move greater than the expected move. Yes, this is a good point and you mentioned something very important. I would, if you, like I said, there are many ways to play the earnings results. A lot of people, and there have been a lot of studies on that, and there's a special tool here for that, play these LongStradles because they believe volatility would rise, but that catches up with them. So most of these trades lose. So I have a play on Netflix, a LongStradle, because I have great data on that and it's doing really well because it's rumping up and doing what it should do. Plus, what else does these do? And this is some little bonus here already now, not on the end. If you have LongStradles on, let's say a couple of days out or let's say maximum two weeks out, they are protection for most people because they're selling short volatility. This is what most people do. They sell short volatility and maybe not in a zero DTE, but let's say for 45 days or even leaps. So if you have some LongVal on, this is like your cushion. If you don't want to buy or mingle with the VIX, just a little bonus. But you ask a very important question, how to play that. I would maximum play the IV rush, let's say it like that. And the LongVal game on very few stocks one or two weeks ahead. Best, it is played one day ahead. We have a special tool here. But on the earnings result day, like you said, I would, I often do the straddle for a simple reason. I look at statistics and I'm most probably not going to play the close to the expiration. I will try to see if I go out two or three explorations, especially if I can go to a monthly expiration because for two reasons. On a short volatility, and like you said, if you do it with naked options, you have unlimited risk. If you do it, let's say naked, but long, you just lose your debit, which is not nice. But if you go out further in time, the IV crush is not that hard. If you want to go close to the earnings result, let's say, like I said, you have Netflix earnings. Let's presumably, we have them tonight. And tomorrow is the last trading day of the week. I would go with an inverse butterfly, for example. What is that? It's not the classical butterfly where we buy to add the money, sell to it the money options and buy cheap wings. Basically, it's nothing else than a short straddle with wings. We would just turn it upside down. I can strange the things. We would buy the at the money straddle and try to finance that with some short wings, that would be a good thing. You can do the same with an inverse iron condor. Or you could basically calendars. They are longvaled trades, yes, but they-- Yeah, I have seen some longvaled calendars, which is something I started to look at. But yeah, so an inverse butterfly is essentially buying a straddle with protection a little bit, because you're selling the wings. You have another tool called Drift Lab, where you kind of examine the post earnings drift. And I started thinking about that when you said buying a straddle that's maybe 30 days out to maybe-- so it's, quote unquote, "cheaper" and sense of volatility. But I immediately thought, well, if you know there's a move, if you know you want to be longval, and the post market drift, if you're right, does help. Do you look at things like that, maybe combine the two? That would probably have to be done in your own analysis, when you're looking at these tools. That was just kind of my immediate thought. And maybe you can go ahead and touch on the post market drift tool with that. Yeah, we can look at the drift tool. That's a good idea, because this is what a lot of people ask. What do I do with the trade I've already set up? Let's say you set up a trade, let's say longvaled trade. Let's say we believe the last 10 years, Netflix, was a longvaled trade. And it always broke the implied move. And from the analyze tab, we saw that it drifted for two days in the direction, up or down, what happened in the end of the day, of the earnings results. So the drift tab shows us clearly, does it make sense? Will it drift or not, and never know what will happen, actually. But this address statistics you can use. You can look also at positionings. This is what I do. You look at the options flow before. So you see a bit what the market is doing. You can use levels on that day. But let's keep the data what we have here. And you can add the other stuff later. So what I do is, let's say we have Netflix. Again, imagine we are at 500. We set up a long straddle, maybe two weeks out for the monthly here, for the sake of it, because monthly is more liquid. Liquidity is king, always. And let's say Netflix is allowed to buy Warner Brothers. And people are very happy with it, and they announced it tonight. So it pops up more than these 9.6%. Let's say it pops 15%, which is amazing. What is the first thing I would do? The first thing I would do is I would close my long put for small loss, because really, really my call is really nicely in the money. And if I know that there's a drift, I would keep this call on. What else I could do when the drift lab, let's say it shows me only two days, but I believe in in continuation, because everyone knows about the levels, gamma levels and all that stuff. If important levels are breached after the expected move has been breached, market makers have to sell into rallies or buy the dips. So let's say it goes on for two days, the race. Maybe if I see we go to some inflection point on the third day, maybe I would start selling a call there and taking off some chips from the tables where I have suddenly I have a debit spread. And how did I come up with this? Because I saw the drift lab, which showed me that this stock has a continuation, a very high statistic of continuation, basically based on the data from whatever horizon you choose. Will this happen? We aren't sure, but we can only look at the data we have and basically make a plan. This is what Erning's Watcher is for, like all the other tools one can use. Make a plan, be prepared and act according to your plan, not just out of what you see on a chart and try to catch a move or not. Gotcha, yeah, that makes a lot of sense. I know the options to get a little bit more expensive around earnings as we've talked about. I've seen things about when that starts to happen. It doesn't happen overnight. There can be sort of a gradual build to that. And so what pre-market and let me back up a little bit and say one of the things that I've always struggled with with with earnings is I guess maybe just being organized. And because if you're thinking about if you're going to do Valkrush and you see a stock and you see it in the news, oh, so and so reporting earnings next week or tomorrow, you've already missed any sort of ramp up in volatility. So you're sort of stuck into the Valkrush trade if you wanted to trade it. So how can Erning's Watcher kind of help you stay organized? Because these things only happen for quarters out of the year for each stock. And so when I used to trade options on stocks, I would actually avoid earnings. And I would have to kind of look forward and say, okay, I don't want to put on a 30-day trade because I know earnings is in two weeks. And if my idea at the time, is it going to profit in two weeks because I want to take that trade off? So tell me a little bit about just the organization, I know you guys have a calendar, but I am interested in learning about when does the option volatility for the earnings related? When does that start to actually pick up and are there trades you can take before earnings? So if you actually want to avoid the earnings risk, is it playable prior to earnings with the ramp up in volatility? I know that's a multi-part question, but yeah, I'll leave it there. Yeah, I think I answered some of it before and statistically, there is a lot of PhD-graded papers on that. I would advise most people to, if you put up on trades, like you said, be aware of earnings or make dividend dates, especially if you were calendars. But statistically, most long-vall trades, even in the last two weeks for earnings, they would lose. You can combine that by selling. Basically, if you are a long-vall, you can make money by selling short-vall out, let's say in some other circle, let's say you go out two weeks and you sell the weekly strangle, and you can refinance that because in 80 to 90% of the time, the ivory ramp happens, but Theta beats you. So how can earnings watch our help here? Basically, we get organized here, like you said, we have a calendar and it shows you what is coming up. It also, you can filter it easily by just having the full week. It shows you the full week, and what is more important because I'm a trader of liquidity. I don't believe in telling slippage to brokers and others. I believe it's important to look at the things and basically look only for liquid trades. For example, next week, earnings season hits off and the founder of CEO of earnings watcher, he gave me the info. He will try to have a total refresh and rebranded earnings watcher dashboard here with all the things we have thought of that will make sense, which will make it even better. So the easiest thing is you go into your calendar, you look at the earnings coming up, choose only the liquid ones, and the next to answer the question fully is, how do I trade the IV RAM, not the earnings result itself? As I said, if you don't know what you're doing, just avoid it and just concentrate maybe on the last day or the last five days, and there's a special little tool called IV Rush, and what does these tools do? These tools will show you how volatility and how the IV RAM, statistically and historically will happen. So let's say you have a Netflix, it would report tonight. Don't think about the earnings result itself. We don't want to trade that, we just want to trade the IV RAM. If we looked at Netflix right now and we would see, let's say, the straddle would cost 1,000 dollars, so 10 dollars in options terms, and we looked at how the straddle price statistically has evolved. Earnings Watcher in the IV Rush shows if it is the right moment and when is the right moment to enter. So it could be at the opening of the market, which we already have passed now, or it could be in the last two or three hours, when normally the IV RAM is at happening, the fastest and the highest. And why is this important? Because on the last day, especially if you are long, you are in long-bowl trades, which are especially if the week ends and you choose the closest expiration, you have Theta on steroids, I would say. It burns so fast, you can't even look at it. You can't catch it with a human eye. That's why this IV Rush is there and what Earnings Watcher does in the weekly data picks, it picks out the more, the best place there, which makes sense and there is a daily post and the discord showing which place makes sense in that day, which trades could make sense and which trades should be avoided and then you can just take your dashboard, look at the time curve, look at the at the money IV and how the IV will change and you can see how much if you buy an at the money straddle, how much you would make in the best case and how much you would lose. And this is something very important, we are looking at another stock right now, but straddle price is at 515 and the max you can make is 539 and the straddle price without the IV Rush would be $3.69, would I take the trade? No, never, I wouldn't take the trade because along the slippage and everything Mahoods pay more than I could make. So this is a trade, even if IV Rush is and the project that IV Rush is favorable, I wouldn't do it. So that's why. Yeah, helps me focus on the most important ones. I see that Earnings Watcher has kind of like a data picks or you know, there's so many stocks. So what does that tool do, is that help you choose which ones to consider, like by, you know, like liquidity or which ones tend to have that maybe highest rating, is that what that tool does and how does that work? Basically, this is the easiest approach. So if you are novice and you start here, you should start off here because it really categorizes into four categories. It has IV Rush, the one we just showed, this is something that will show you the most, the stocks which would benefit in the last day from IV Rush and there is a daily still beside these, beside these setting in the dashboard and it will, there will be a post, which will be very precise and then you have the very three very simple other points in the dashboard here under data picks, you have long wall play, short wall plays and momentum. Right now, the Earnings season hasn't picked up, that's why it's not that full, but next week we have a lot of things kicking off, so the calendar is full. So we will find things under long wall, short wall and momentum and if we drift back to short volatility, another good thing here is it will focus on liquid stocks mainly. So if there are undiquid stocks there, there will be sorted out, you can still play them on your own, but they won't be advised here. And they have made it very easy with three colors, if you just want to look at the colors, they have prime, favorable and watch, prime are the ones which have constantly not broken the implied move, so you always stayed in your one standard deviation for the week. Basically, then you have the favorable ones where it is not a tossing the coin, but it's still favorable. You have statistically more than 50% you stayed in the implied move and then you have the ones who basically you can watch, they had some breakouts, but they weren't that far away. So it's up to you to decide to check the data, maybe see what happens around, look at the positioning, look at the options chain and other stuff, people which are more insightful. But for someone who starts brand new, knows a bit about options, if you just take the prime ones, then you are well and again, everyone gets wiped out, everyone, even the ones who believe they know something about trading, if you take too much risk, so it's always good. When you do short roll, I've seen a lot of people doing short strangles there. I've done that myself when I, but I know what I'm doing most of the times, but still I wouldn't advise it. A short roll play would be basically sell the short straddle, that would be one of the good ones and maybe three X out or two standard deviation cheap wings. And if you don't win, you have a high win rate and basically you don't get blown out of your account or do a calendar or double calendar, something like that. This one gives you the exposure you want to Vega and Seta in one. Very interesting. For the data picks section, how often does this update? I know, I think you said earnings kicks off next week, so is this something you check? You would check it each week, maybe on a Sunday, because I'm trying to think like a process. If you wanted to trade, you know, earnings seasons coming up. What's the process? If earnings watcher is saying, "Hey, here are the highest probability or the best data performing ones," and you just wanted to start there, like you said, is this something you check every day, every week, or what kind of process would the user or the trader kind of look towards? Yeah, basically it's very easy. You get in weekly newsletter by earnings watcher where you have all the highlights. You have basically the highlights of the week, bigger stocks. Maybe they're not such a set place, but let's say if you had, like we had a couple of weeks back, we had Marvel, we had Salesforce, we had CrowdStrike, we had Snowflake, Toronto Domino Bank, were these traits we suggested or were suggested, not all of them, but a lot of people like to trade this liquid stock, so these are things that the e-mail are highlighted. You can ignore the e-mail, but the e-mail makes it easy. It comes normally on Saturday or Sunday, and it gives you the weeks insights. Then you get the volatility insights where you get basically the place. So we had Mongo database and Octa has long volatility and whoever bought a long straddle on MDB who went up 23%. Again, I had this a couple of years back. I remember that move. I wasn't in it, but I saw the, I mean, it was a big deal, wasn't it? Yeah, you pay, let's say, if you take the closest expiration, you pay it like, I don't know, 4,000 or something or 3,000 or 3K, and you end up like with, you double it within a couple of minutes. This is what people want to see, but this is not the gives you consistency. Yeah, that's that's pretty rare. So this is something you can do. Yes, if you know what you're doing and what I always advise and we haven't talked about risk management, a lot of professional traders, they allocate, if they know what they're doing with earnings, like 6% of their buying power, I would advise like with any other trade, especially if you just are new to earnings or options trading maximum 2%, and if you can, let's say even for a long play, like we said, you can use an inverse, iron butterfly or condor or for the short role plays, you have very cheap debit calendars, for example, which in the end, pay you a credit. This is something which is better than just allocating money you don't have. That's a thing. And yeah, it gives you the IV rushes for the week and then which is very nice and very nice for a lot of people. It gives you this last week's top three position in paper trading, like people, there's a paper trading section they can put on their real trades there. So people can comment on that in the discord, but these are explained. So it's shown how this strategy was set up, why it won and you always have a key edge or a lesson on that, which is very important. And I have my own channel there where I put up some trades. Maybe people wouldn't notice because I also look at a lot of other data, for example, these Netflix long straddle as a hedge trade for the uncertainty in this week, plus a very nice IV ramp paying 5 to 10%, it's very nice that we are beating Theta. This is okay. I will take that. It's free money. Very cool. Well, I definitely recommend the listeners go check out the website and to clarify it is earnings dash watcher.com. They were nice enough to offer a discount code to listeners of this podcast. So if you want to use the code sm ot for stock market options trading, you can get a little bit of a discount and get started. And to be honest, I looked at the price and it's really an affordable service. A lot of times you come across data tools and there are hundreds of dollars a month and this was, I don't have it in front of me, but it was very, very affordable. I think it's something you could start with and the discount's going to help. So again, check out earnings dash watcher.com. Use the code sm ot and you know, earnings season is about to kick off. So this is a good time to get this episode. I've got this episode in. So Dan, thanks for coming on the show. We'll look to talk to you soon. Thank you, Eric. It was a lot of fun and thank you for having me.