If you expect the stock’s price per share to increase following an earnings report, you’re considered to be bullish.
You can potentially consider the following example strategies organized by complexity, and risk level:
- Buy the stock before the earnings report.
- If you’re correct, and the shares increase in price, you can sell them for a profit following the earnings report, or hold them to sell in the future.
- Buy (long) a Call option with an expiry date after the earnings report.
- Call options give you the right (but not the obligation) to purchase 100 shares per contract of the underlying security at the strike price.
- If the stock’s price rises (or volatility increases) , you can either sell it back into the market for a profit, or exercise your contract if desired.
- Learn more about Long Calls in this article.
- Sell a Covered Call (if you already own at least 100 shares), or participate in a buy-write strategy.
- Covered calls may provide extra income in the form of a premium, however you risk having your shares being “called away” if the share price increases above the strike price by the expiration date.
- Learn more about Covered Calls in this article.
- A buy-write strategy is when you purchase 100 shares of a stock at the same time as selling (writing) a call option against the same underlying stock.
The three strategies explained above are available in all accounts, including registered accounts like TFSAs or RRSPs. Remember, to trade options, you need to have them enabled in your account.
If you’re trading with a Margin account, the more advanced options strategies below are also available if you’re bullish on a stock before earnings:
- (Bullish) Vertical call spread
- (Bullish) Vertical put spread
For more advanced traders, Questrade offers multi-leg option trading in all of our Edge platforms, giving
you easy access to order entry for multiple calls, puts or shares.
Note: Transactions in options can carry a high degree of risk, and may not be suitable for investors with a limited risk profile.
Purchasers and sellers of options should familiarize themselves with the type of option (i.e. put or call) they contemplate trading and the associated risks.
Before diving into options strategies, make sure to learn the basics of how options trading works.
Options tip: In general, immediately before an earnings release, options have a higher implied volatility (IV%) compared to the 30-day historical volatility of the option.
Essentially, the closer it is to an earnings release, the greater the potential implied volatility will be (due to the potential for price swings). Right after an earnings release and subsequent price action, implied volatility will generally drop back
down to the historical average. This decrease is often referred to as volatility crush.
This generally makes options contracts more expensive closer to a company’s earnings release, which can significantly affect your strategy whether you’re buying or selling options.