To The Moon

Earnings season is highly anticipated by investors, and it is a time of stock volatility. For a new options trader, there are ways to hedge positions or take profit from volatile stocks.

Today we will be sharing some resources on how you might want to approach the coming earnings season.

#1：Long Calls / Puts

There are some advantages to trading options for those looking to make a directional bet. If you think a stock price will rise after earnings, you can buy a call option using less capital than the asset itself. At the same time, if the price falls, your losses are limited to the premium paid for the options and no more. This could be a preferred strategy for traders who are "bullish" or confident about a particular stock, ETF, or index fund and want to limit risk. In addition, there are those who want to leverage to take advantage of rising prices.

（Sources: Option Alpha）

Instead, if you are "bearish" on a stock, ETF, or index fund with link risk, you can buy a put option.

（Sources: Option Alpha）

#2：Protective Puts

A protective put is purchased when an investor owns a stock and wants to protect it against further downward movement. Owning the long put defines risk by allowing the investor to sell stock at the long put option’s strike price.

（Sources: Option Alpha）

In effect, this strategy puts a lower floor below which you cannot lose more. Of course, you will have to pay the option's premium. In this way, it acts as a sort of insurance policy against losses.

However, the goal, as the name implies, is downside protection versus attempting to profit from a downside move. If a trader owns shares with a bullish sentiment in the long run but wants to protect against a decline in the short run, they may purchase a protective put.

If the price of the underlying increases and is above the put's strike price at maturity, the option expires worthless and the trader loses the premium but still has the benefit of the increased underlying price.

On the other hand, if the underlying price decreases, the trader’s portfolio position loses value, but this loss is largely covered by the gain from the put option position. Hence, the position can effectively be thought of as an insurance strategy.

#3：Covered Calls

Selling a covered call is a strategy that is overlayed onto an existing long position. A covered call is when you sell someone else the right to purchase shares that you already own (hence "covered"), at a specified price (strike price), at any time on or before a specified date (expiration date). The payment you receive in exchange is called a premium, which you keep regardless of whether the call is exercised.

This is a preferred position for traders who are willing to limit upside potential in exchange for some downside protection. However, if you expect no change or a slight increase in the underlying price, you can sell a covered call to collect the option premium.

（Sources: Option Alpha）

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