[Options] Avoiding Earnings Landmines

Sean McLaughlin
October 19, 2022

It's that time of the quarter where we options swing traders need to be extra mindful of pending earnings releases. The last thing we want to do is place a directional bet in a stock or it's options heading into a binary event that could decapitate us in a heartbeat.

This is frustrating us right now because most of the charts we like best (both the bullish and bearish ones) are in stocks with earnings slated to be released in the next week or two.

During our morning Analyst meeting today, we discussed the fact that many of the banking/financial sector stocks have already reported earnings by now, therefore, this is a place we should look.

Specifically, we like the big money center mega/multinational banks that are represented best by the $KBE ETF. Here is a chart that paints a pretty good picture of why we like it:

While a topping pattern is clear to the eye, we like how it has held above the June lows and hasn't been oversold in nearly a year. This is relative strength that we like a lot. Options premiums are not excessively high, but they still offer us good juice to sell some naked puts in to make the risk worthwhile. And we've got a pretty clear level we can lean against for risk management purposes. Since we're not aggressively bullish here, but think the lows can hold, selling puts feels like the right move.

Here's the Play:

I like selling naked short $KBE December 44 Puts for an approximately $1.15 credit. Because we're naked short, this position will require margin from our brokerage and we need to be vigilant on managing risk if $KBE starts moving in the wrong direction.

As you can see from this PnL graph, we have UNdefined risk if $KBE were to crater:

The fact that this is an ETF decreases the likelihood of any dramatic selloff, but we still need to be vigilant. Therefore, if we see any $KBE close below $44 per share (the recent lows), then we'll look to close the trade (win or lose) to prevent the situation from getting any worse for us.

In the meantime, we'll leave a resting order to close these puts for a profit at a 55 cents debit, good 'til canceled. Just set it and forget and let the market take us out with a profit.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

Filed Under