With earnings season back on the radar, it’s a great time to highlight some recently released tastytrade research focusing on this dynamic subject.

Earnings is especially intriguing this summer because volatility has been so muted during the first half of 2017. Will earnings season generate enough pressure to finally move the needle on the volatility barometer? Only time will tell...

In the meantime, a recent episode of Market Measures contains some important information that may help you optimize your approach to trading earnings.

For those just getting acquainted with this niche of options trading, we recommend reviewing a previous installment of Options Jive, which provides an A-Z guide to trading earnings.

For those already initiated into the earnings club, the aforementioned episode of Market Measures may help you get to the next level.

The focus of this show is to present research that examined whether there were any noticeable differences between trading "value" stocks as opposed to "growth" stocks during earnings - particularly as it relates to short premium positions.

Value stocks tend to be defined as established companies that trade with high dividend yields, low price-to-book ratios and/or low price-to-earnings ratios. For these reasons, value stocks are often perceived to be trading at a lower price than their fundamentals would suggest.

On the other hand, growth stocks are those companies perceived to have the potential to grow earnings at a faster rate than the average publicly traded firm. Growth companies generally do not pay a dividend, electing instead to invest in themselves. Growth stocks are often perceived as riskier investments because of their reliance on future success, as opposed to an established historical track record.

On Market Measures, the team designed a study to evaluate how a particular earnings trade (short strangle) performed over time when looking specifically at two types of companies - value and growth.

The companies in each group (for the purposes of this study), included:

  • Value Companies: GE, PG, WMT, JPM, T, XOM

  • Growth Companies: AAPL, FB, NFLX, AMZN, GOOG, TSLA

Using data from 2010-2016, the study measured the performance of 16 delta short premium strangles in each name during earnings. The duration of the each trade was approximately 3 days-to-expiration, encompassing the release of the quarterly earnings report.

Pictured below are the results from the “value” group:

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As you can see above, the results for the “value” group were quite encouraging, with a high win rate for each of the six names included in the study. Additionally, only one of the six names had a negative average P/L.

Next, the guys on Market Measures present the findings from the “growth” segment of companies, including the likes of AAPL, FB, NFLX, AMZN, GOOG, and TSLA. While we have not included the full results from this group in this post, we hope you’ll watch the complete episode of Market Measures in order to review that information.

At a high level, the results from the “growth” group showed much higher max losses. However, on average the “value” group still produced an attractive win rate for 5 of the 6 symbols included in the study. NFLX produced a win rate only slightly above 50%, while the other five companies had win rates of 70% or greater.

On the show, the hosts discuss the results in greater detail and provide viewers with some valuable advice. If you are planning to trade growth companies for earnings, it might be wise to utilize only defined risk trades due to the potential for outsized losses.

If any of the trades outlined above appeal to you, and fit your risk profile, you might consider deploying some mock trades during this earnings season to monitor how the trades perform. If you feel comfortable with approach going forward, you could then consider going “live” during the next earnings season.

Please don’t hesitate to reach out to us directly with any comments or questions at support@tastytrade.com.

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.