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3 tactics to trade earnings season with only positive surprises: Shubham Agarwal

Post result analytics especially right after the numbers are out should be traded via a combination of Buy and Sell position in options instead of just a simple long position in options.

SHUBHAM AGARWAL | 09-Jan-21
Reading Time: 3 minutes

undefinedOnce again, we are at a point in time in the Result calendar where the corporates announce their results. These are interesting times because upcoming results may impact the future trajectory of the stock. Some of them could even alter the ongoing trend of the certain stocks.

Hence, we should expect excitement led by results in the coming days not only in underlying prices but also in their options prices. So, let us just break down this event of result in 3 different periods and figure outset of tactics that would help us trade rather smoothly despite this event led excitement.

#1 Pre-Result
As the results near for stocks or for that matter for the entire market (represented by major indices like Nifty), the excitement about the unfolding of unknown start getting priced in day by day. While volatility is what feeds the directional traders, event led volatility also creates a bit of fright especially among the Sellers of the Options (As for them volatility is an enemy).

The impact of the rising excitement and fear of upcoming volatility can be seen in the option premiums. The sellers would usually ask for more premium for selling options. Hence, as the result season nears, we should expect a rather gradual yet consistent rise in premiums across strikes. This can be observed from implied volatility figure which is the standard measure of option premium across strikes.

Recent example of TCS is apt for such observation where a 23-26% IV of normal days spiked by around 6% to 33% in a week’s time.

Pre-Result Tactic: Since we know such behaviour of option premiums, to have no negative surprises we could avoid net selling options in pre-result period intended to be squared off before results.

Also, there could be positive surprise in store for us if we have a directional bet for immediate term traded via Buy Option. Regardless of price action, there could be small price boost that could come into premium as result date nears.

#2 Through-Result
This is a phenomenon that most of us are used to. However, just by being aware of the result date half the work is done. As the stock goes through the result, we could expect unwarranted volatility which in turn could bring in unsustainable moves. Hanging on to such moves with deeper stop losses could be lethal.

Through Result Tactic: It makes sense to be ready for any known behaviour of the underlying during its results. Here a simple Result Analysis can be run where at least a couple of days prior and couple of days post reaction can be analyzed. This could give away any common course the stock has been following especially towards the results.

One more tactical move that comes in really handy is the agility. The extra volatility may bring the stock down or up without any prospect for sustaining the same. Hence, small horizon trades with long option can be used with tight stoploss. Once the stock moves into the favorable direction, one could sell a higher Call/ lower Put against bought Call/ Put and book part profit.

This would cover most of the cost of the trade and would keep us ready only for a positive surprise but with a tiny and more importantly known maximum loss.

#Post Result
As they say once you open the lid of a soda bottle the fizz dies down. It’s the same analogy, where lid is the result and fizz is the IV. As soon as the result is over, the fear of unknown is over and the IV would be in a hurry to fall back to its normalcy.

The fall in IVs would be much faster than the rise. At times it may not give us time to react to it. This development would impact both Call and Put premiums negatively. All the option premiums would fall regardless of the price movement.

Post Result Tactic: Post result analytics especially right after the numbers are out should be traded via a combination of Buy and Sell position in options instead of just a simple long position in options.

Many also resort to selling extra options. For example, in case a long trade is being contemplated, one may Buy a Call and Sell 2 farther strike Calls. Since, the IVs are expected to be in a falling spree. This could be advantageous. However, I could never gather courage to do so, since the aftermath of the results at times may push the stock a bit higher or lower, which could directionally harm the options that we sold extra.

These are common and simple practices that helps us keep away from any negative surprise an in turn open doors for a positive surprise during the result season.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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SHUBHAM AGARWAL is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

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