Leading Into Earnings
This step focuses on how to handle a trade when earnings are approaching. While trading through earnings is generally avoided, there are specific conditions that may justify holding the position.
What to Do
1. Check if the Trade Is Already Profitable
○ Ask yourself: Are you up money or not?
○ If yes, proceed to the next step.
2. Does the Expected Move Break the Trend Line?
○ Identify your trend line, in this case, the 10 EMA.
○ If the expected move breaks the 10 EMA, you will exit the trade.
3. Calculate the Expected Move
○ Go to the options chain closest to the earnings date.
○ Look at the at-the-money call and put.
○ Add their prices together to get the straddle price.
4. Expected Move Formula
○ Multiply the straddle price by 0.85.
○ This accounts for overpriced options, as market makers build in extra cushion.
5. Example:
○ At-the-money straddle: $4.64
○ Expected move = $4.64 × 0.85 = $3.94
6. Measure the Range
○ Current price: $129.58
○ Upside: 129.58 + 3.94 = 133.52
○ Downside: 129.58 – 3.94 = 125.64
7. Compare Against the 10 EMA
○ Check if either side of the expected move would break below the 10 EMA.
○ If not, the trade may be held through earnings.
○ If it does, close the trade before earnings.
This approach helps you make an objective decision about whether to hold or close a trade leading into an earnings event, based on your trend-following rules and calculated risk.
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