Options Trading: Having Edge Into Earnings

Hey, this is John Napolitano here with you from Top Trading Pros. I am the options instructor at Top Trading Pros. My job is to help educate people in the options market. I’ve been an options trader now for over 20 years. I have over 20 years of Wall Street experience on the institutional side and on the retail side as an individual trader.

Trading my own capital. So that is a little bit about my background. For those of you who don’t know me, if you’re new to this YouTube channel, I welcome you to subscribe and like our channel. We’re going to always produce honest and clean and good content for those of you who want to get their feet wet with both stock and option trading.

So at Top Trading Pros, one of the things we do is teach people my basket option strategy, which basically involves having more of a holistic approach to options trading. Instead of just worrying about one particular name and trying to hit a home run on one particular stock or one particular idea, what you really have to do is realize that markets are interrelated.

Nothing is in a bubble or a vacuum. So you have to have a bullish or bearish stance on the markets and going into the earning season, it looks like the market seems to be very bullish. So as reluctant as I might be, as far as my opinions about the economy or about what’s going on with interest rates and blah, blah, blah.

You really have to look at what’s going on and be bullish. So I try to teach my students the best way to do that is to not look at every stock as an individual. thing. You have to look at your portfolio and your basket of options in its context, whether it be bullish or bearish. So that being said, going into earnings, I am, I’m pretty bullish.

So my portfolio, my basket of different trades that I have on are bullish. Now, tonight we have Netflix, we have Tesla. Tonight’s probably one of the more interesting nights we’ll probably have going into the earning season. And one of the things I like to tell my students is you can’t beat the coin flip.

This coin flip of trying to guess earnings, whether they’re going to be good or bad, usually works against you. And the reason why is because you can be correct in your assessment. You might think that, let’s say, Netflix is going to have really good numbers and a really great quarter.

And even if they give good guidance, who knows? I’m going to share my screen with you right now. And this doesn’t mean that Netflix won’t rip another 10, 10, 20, whatever percent. But the whole thing is if you’ll notice here, I’m going to just show you really quick, the chart, as you can see, I’m going to make this a little bigger so you guys can see it is pretty priced to perfection.

It’s all the way up here. There was just a news article on Bloomberg saying how Netflix has a positive skew going into earnings, which means that most option traders think it’s going to go up. Now this stock looks like it’s going up, up and away. Now, if you go to the weekly chart, you can see that it does still have room to run.

So I’m not saying that it’s necessarily a bad bet necessarily to go long, but there are more things that you can do and things that kind of give you an edge in earnings. And that’s pretty much the purpose of this video. I want to talk a little bit about things that kind of give you an edge. With Netflix, you don’t have too much of an edge because you’re basically guessing the coin flip and you can be correct.

You can be correct in your assessment that the earnings will be good, but then you have to guess the reaction. So it’s less than a 50-50 chance. If you take a 0. 5% probability and multiply that by another 0. 5% probability, you really only have about a 25% probability of getting the whole thing right. So what I tell my students is to risk accordingly rather than if you have a low probability, but a high reward situation.

There’s nothing wrong with taking a trade like that, but just be aware that you have a lot of probabilities against you. What I like to do and what I teach my students are a couple of tricks, which I’m going to share one of them with you now. I run a, I run pretty much a screen around earnings.

And what I’ll do is I’ll look for something called a short float. One of the things I like to play is momentum into earnings. So in other words, sometimes buyers are forced to buy a stock before the numbers come out, because let’s say they’ve been short for a long time, and now all of a sudden there’s a news event that’s pending, aka earnings, and basically they need to get out of that position before a news event might cause their whole position to go the wrong way.

So that’s usually what happens with a short squeeze. You might be short for a very long time. And what happens is. Buyers start to pile in to cover their shorts prior to earnings coming out. So I’m just running a screen really here on Finviz. Anyone can do this. Finviz is free, by the way. Just go to finviz.

com and you can use it. But basically, I’m looking for a short float. I’m going to make my screen a little bigger here so you can see what I’m doing. I’m making a short float over 25%. So that’s a pretty strong short float. I don’t like to mess with anything under 20. I’m not into these low float or penny stocks.

That’s not the purpose of this video. You can trade those, but. For options trading, I like trading things that trade well. So things over 20, that’s going to be more household names, institutions, trade and stuff like that. So just by these two short little filters over 25% short float, which means there’s a large amount of people shorting the stock.

And then here, obviously I want it to be optionable and shortable because I am trading options. I want there to be options available. And as you can see, just by these three filters that I’ve applied, I only have 21 names in my basket here. So what I’m going to do then is I’m going to go to charts, and then what I’m going to do is I’m going to look at names that are really beaten up.

Now, as you can see, some of these names are in uptrends because people are covering their shorts already. into earnings, but there are some names here that you can look at. One of the names that kind of came across my filter was this one. Now this is a biotech stock. So there might be a news event or there might be something going on here, but as you can see B M E A has already sold off pretty substantially here.

I’m going to make the screen bigger. And this is the kind of stuff I look at because last earning season back in April, you can see it had a very significant jump that went from 15 to 35. And now it used to be a 40 stock and it’s sold off pretty substantially down to 22. So the stock is basically 50% off its high.

It has a over 25% short float and the earnings on this thing. You can always go to this trustee website, earningswhispers. com. These little tricks. I’m going to show some of you guys that aren’t maybe familiar with some of these websites. They give you plenty of free information and free is always good when you’re first starting out.

And basically here tells me that. Right over here, it tells me that BMEA is reporting earnings on July 31st, which is next week, pretty much. That being said, this has the possibility of a short squeeze. So I’m trying to create an edge into earnings. So anybody who’s short this name, I know the stock chart looks terrible.

But what I’m trying to say is any type of movement to the upside in this stock will produce a little bit of panic among the short sellers and that. Kind of panic is what I try to capitalize on. And as you can see, I’m doing all of this before the numbers of the news even comes out.

Now, if I get some equity capital in this trade, if I start winning, in other words if what, if my thesis starts to work out, What will basically happen is I’ll use that capital. Let’s say I’m making 30, 40% on the option premium. I will use that capital to hold that number into earnings. So now I’m essentially betting with house money going into earnings.

So I’ll take a little bit of profit off the table. I’ll use what little let’s say I made 20, 30%. I’ll use that money, that amount of contracts. To stay into the trade, I will essentially be using free money to take a move into earnings and momentum move in other words. So these are strategies I teach my students to top trading pros.

They’re not rocket science. They basically talk about. Trying to create an edge into earnings is really important. It’s not necessarily an easy thing to do. So I wanted to just show you an example of some of the things we teach our students. So if you’re interested in this kind of thing, obviously subscribe to this channel.

We’re going to talk about content and different strategies all the time. Check out our website, top trading pros. com. What we just did actually is we really revamped our website. I’m going to show it to you really quickly. It’s really cool. As you can see, it has plenty of content and stuff like that.

You can basically go on here and look at all of our videos. Also, there’s also a link to our YouTube channel here as well. And if you’re really interested in potentially becoming a full time option trader, or even a part time option trader, you can watch some of our videos as well as purchase some of our videos.

The other thing we can do is do coaching. So if you get serious about this and you really want to take your options to the next level. We offer both 90 day coaching as well as annual membership, which does require a little bit of an interview because we want to make sure you’re the right fit for us and you’re the, and we’re the right fit for you.

Which I think is fair, but we have plenty of stuff to get your feet wet, to get you comfortable with us. And I hope you take this journey with us because options trading is one of those things that could potentially change your life. It just requires a little bit of practice, a little bit of skill, like anything else that’s worth anything in life.

So I hope you enjoyed this video. I hope that little tip helped. Remember, always try to have an edge going into options going into the earning season. It’s really important. So enjoy the rest of your day, everybody. Enjoy the rest of your earning season. And I will talk to you guys soon. Be careful out there.

Bye bye.