I observed that option-eligible U.S. Stocks can change in price in quantum fashion AMC (after market closes) or BMO (before market opens) after earnings announcements. I was attracted to the huge profit potential of options. For example a 3% change in stock price can result in a 50% or more return for an ATM (at the money) option. I developed my method to make a forecast on market direction of a stock ahead of an earnings announcement. It’s not an easy task to endeavour to beat the coin toss on every trade. An appeal to this type of trade ahead of earnings announcements you get results the following morning (Good or Bad). You don’t have to wait days or weeks or months to find out the result. This type of trading compresses time only to be met with another trade opportunity the following trading day.
The information content of the option market increases as earnings announcement approaches. I study the following metrics and I look for options that are giving strong readings of market bias.
- Option Volume
- Option Open Interest
- Option Prices
- Results of the Lee-Ready Algorithm Applied to Calls/Puts Sold or Bought
- Implied Volatility Levels Vertical and Horizontal
- Implied Volatility Skew Charts
How I put it all together I won’t tell you – I have a livelihood to protect. I do not claim to hold the Holy Grail to option trading. The market is not a physical system that can be described by equations or algorithms. The market being made up of human participants has a mind of its own and it will do what it wants to do.