How to Trade Earnings Releases with Binary Options

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Video Transcription:

Hello traders. Welcome to Daytrading Binary Options. And in this session,
we’re going to teach you how to trade earning releases with binary options.
As you already know, the earnings are released after hours. And there is no
way you can buy binary options after hours, because when the markets are
closed, the binary option brokers don’t allow you to calls or puts for the
companies that aren’t releasing their stocks. So in this lesson, we are
going to teach you how to trade the releases the next day at the open.

But first of all what are earnings? Earnings are the amount of profit the
company produces in a specific amount of time. Usually companies release
their earnings on a quarterly basis. Earnings refer to after tax income,
and they are the main determinate of a stock price, because they are the
main indicator of a business profitability in the long term. Analysts study
these numbers quarter after quarter and year over year and come up with
estimates. When earnings miss or don’t meet these estimates, the stock
price will drop sharply.

And when earnings beat or surpass these estimates, the stock price will
rally. And this occurs after hours. We’re going to see an example of what
we’re talking about on the next slides.

Because earnings are usually released after hours, you can’t buy binary
options at the time of the announcement. And even if you could buy binary
options, or puts or calls depending on the outcome of the release of the
earnings, it will be very difficult because it is a period of high
volatility. And even if you’re trading shares, not binary options, it is
quite difficult and sometimes you can get caught in drastic moves to the
opposite direction of your trade. Because sometimes the price of the stock
will jump 10 points, or maybe 20 points after the release, and then [we’ll
trade] 30 points to then continue to the upside.

So you need to have a little bit of experience to trade after hours. And of
course, there is not as much volume after hours. So when there is no
volume, a large order of buy or sell can move the market very sharply.

So you need to be careful and not [inaudible 02:39]. Since you can’t buy
binary options after hours, we’re going to focus on the next day options,
okay? But we need to analyze where the release was. We need to understand
what they are telling us with these numbers, and we need to know what the
stock price has done after hours and pre-market.

So you must wait until the next day’s open to trade. The usual way these
numbers are released are in a per share basis. Earnings per share is the
portion of the company’s profit allocated to each outstanding share. And
the calculation is simple. On the net income, you subtract the dividends
the company pays out, and you divide it by the average of outstanding
shares there is.

Let’s have an example. Let’s imagine a company called ABC has an income of
$35 million for the last quarter. And they pay out $2.5 million in
preferred dividends. And then we know that the company has $33.7 million
outstanding shares. So the company, ABC’s, earnings per share will be $35
million minus 2.5 million divided by $33.7 million which will give us an
EPS or an earnings per share of 0.96.

Okay, so the naked number, let’s say, doesn’t mean anything. We have to
compare it with the last quarter’s earnings per share. And, of course, we
have to take a look at the estimates, because the estimate will trigger
buys or sells on the stock when the earnings per share are released.

Now let’s look at an example. We’re going to analyze the earnings for the
fourth quarter of 2013 for Netflix. Let’s take this example, okay? The
release was scheduled for after hours and the estimate was an EPS of $0.65.
The estimate was an earnings per share of $0.65. The previous quarter EPS
was 0.52 which was a bit on the estimate of 0.48. This means that on the
third quarter Netflix beat estimate by $0.05, okay?

And then the release came out after hours, and the actual EPS were 0.79
beating analysts’ estimates by $0.14. Remember we said that the estimate
before the release was 0.65 earnings per share. And after the release the
stock price jumped from an average of $334 to $387, and that’s a jump of 53
points.

The next day Netflix opened at 388, so the question is how do you trade
this move with binary options? Because you know you can’t trade after
hours. You can buy calls or puts on Netflix after hours. At 4:00 New York
time, the market is closed and there is not a single broker that will let
you buy binary options after hours.

What you need to do is actually wait for the announcement, analyze the
numbers, you need to watch and study what happens after hours in pre-market
to be able to trade the next day’s open.

Now let’s see a daily chart of Netflix. As you can see here, we close at an
average of 334 and after the release price jumped $53, okay? And as you can
see, with the release and a huge bid, because $0.14 release is enormous on
the analyst estimate completely erase the losses the Netflix had during the
last 17 days in just one hour of trading after hours. So this is why it is
important for you to understand the one thing. We are never going to front-
run earnings. What does front-run earnings mean?

It means not to buy puts or calls before the announcement or buying puts or
calls five minutes before the closing bell. We are going to wait for the
announcement. We are going to watch what happens and then we are going to
wait until the next day’s open to trade.

Now this is the chart of the next day’s open. This is 50 minute chart guys,
okay? As you can see, we closed here. You can see the massive volume at the
opening is varied. We have red volume. And you can see that we opened and
we started to dip all the way down here, but we closed all the way up here.
And this week tells us something. Yeah, there were huge sellers at the
open, but we found a very massive bullish pressure that rejected all of
these areas. So once we see this we already know that we want to buy calls,
because the estimates were beat, and we already know the price already
jumped $53. When price already jumps $53 plus markets and pre-markets, we
know that what we need to do is to profit from a short-term momentum to the
upside.

What we’re going to do is we’re going to let the price dip at the open and
then buy that dip. And as you can see here, we waited until we went all the
way down here and we could have bought here. And, of course, the expiration
time on your options is very important.

You don’t want to buy calls in this case of an end of day expiration,
because after earnings release, I mean the stock price is so volatile that
psychological levels sometime don’t even matter, and you have huge orders
sometimes either way, and what you want to do is just wait five minutes
after the opening bell, wait for a pullback to buy a 15 minute expiration
option to the upside or buy a 15 minute call option in this case.

Now let’s assume that we are in another stock. We are monitoring Yahoo’s
earnings release of the fourth quarter of 2013, and it was a miss. And the
price of the stock dropped $7. Okay, what are we going to do at the opening
bell the next day? We are going to wait for a pull back to the upside to
buy puts. Why? Because the earnings release was a miss on estimates.

So what we need to understand here is that when the EPS beats the analysts’
estimate, it means that the company is healthy and most likely, it will be
profitable in the midterm future. And if the EPS are a miss, it means that
the company’s health is not as good as the market thought it was. So that’s
why the price of the stock will drop.

So in conclusion, we have a beat on earnings, we’re going to buy calls the
next day on a pullback, and if we have a miss on earnings, we are going to
buy puts the next day at the open on a pullback.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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