Earnings Strangle

A beginner’s guide to understanding an earnings strangle — the definition, how it works, and a basic example.


Earnings Strangle
An options trading strategy used just prior to a company reporting earnings wherein a balanced position of calls and puts is established on the same underlying asset and maturity (expiration date), but with different strike prices.

In simple terms, getting positioned on both sides of a trade is called a strangle. Executing this maneuver ahead of an earnings announcement is known as an earnings strangle.

How It Works

An earnings strangle is initiated by simultaneously buying an out-of-the-money call option paired with an out-of-the-money put option. This establishes a position with (theoretically) unlimited profit potential to the upside while limiting any downside losses to a predetermined amount.

Earnings Strangle

The goal is to profit off a big earnings reaction in either direction — up or down. When executed correctly, traders can profit off a sizable price movement without knowing the direction.

Example

Let’s say Caterpillar CAT – NYSE is scheduled to report earnings on April 25.

You could establish an earnings strangle by buying the following options…

  • CAT April 97 calls expiring April 28
  • CAT April 96.5 puts expiring April 28

Now you don’t know if CAT will beat earnings or disappoint. As long as the stock moves at least 5% on earnings day, it doesn’t matter.

As it so happens, CAT surprises with strong earnings and the stock jumps from $96 to $104 — a 8.3% gain.

And in turn, your calls gain 360% while your puts expire worthless.

Altogether, this trade balances out to make 130%. That’s because the substantial gain from the calls far outweighs the small loss from the puts.

Advantages

Earnings reactions are often the largest single-day moves a stock makes all year. That’s precisely when you want to be involved, because that’s when the money is made.

Earnings strangles have distinct advantages…

  • You know the exact timing of every trade ahead of time. Every earnings announcement is scheduled in advance, allowing you to plan your entry and exit orders accordingly. This way, you’ll never miss a trade.
  • You have zero directional risk. While most traders look to predict a stock’s post-earnings direction, this strategy removes all of the guesswork. By playing both directions together, all you care about is whether the stock moves 5% (or more) on earnings day. If so, you’ll always win.
  • You don’t need to act fast or quickly trade in and out to get the best price. As long as the stock reacts enough to move the needle, the gains will be sustained throughout the session on earnings day.
  • You can manage and allocate your capital more efficiently. Because you know the buy and sell dates in advance, you can anticipate what will be tied up in the market versus what’s available in cash. This way, you’ll know how much to put into each trade.

In our experience, earnings strangles are consistently the most profitable trading strategy.

If you’d like to start trading earnings strangles but could use some guidance, we invite you to join us.

Start Trading With Us

When it comes to earnings, most traders swing for the fences and speculate on one direction — either up or down. Sometimes you win. Other times you lose. It’s always a coin-flip.

But by trading earnings strangles with us, your odds increase significantly.

Instead of guessing the right direction, you play an inexpensive call option and an inexpensive put option — simultaneously.

This way, the directional risk is eliminated. And when done correctly, as long as the stock moves up or down at least 5% on earnings day, you’ll always win.

Even factoring in some earnings clunkers, the chances of 100%, 200%, or even 450% returns are in your favor.

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