This is generally a great time of year to review, refine and reload in order to best position yourself for the next round of opportunities. Thankfully, we don’t have to wait long.
Ok so what opportunity is this?
The upcoming earning season, starting next week with Alcoa. Trading earnings seasons for typical traders can be tricky – after all you could be absolutely right or absolutely wrong, depending on what jumps out of the bag. More than anything, this highlights the dangers of taking the “typical approach” ie trying to guess what direction the price will go.
Isn’t there an alternative to taking a punt?
Yes, there certainly is. Instead of trying to trade the direction of the price, we instead trade a change in the share’s volatility. Why? Because around earnings time, the share price will become more volatile and, immediately post earnings, the volatility will likely fall.
It should sound logical. In the same way that covered calls allow the trader to generate income from a 100% certain event – time passing by, Butterfly’s also rely on a high probability event – that volatility will increase/decrease over the results season.
The main foundation of the strategy relies on a high probability event.
This is very different from trading directionally – as the traditional trader does – something which is really only 50/50 right or wrong/ up or down. This strategy just might help you generate your edge and generate returns that are quite different to the typical trader – and there are a whole bunch of tools and resources available for you.