This One Simple Strategy Can Yield Explosive Results...

Here's another incredible options trading strategy that can be played during one of the most volatile times of the year - earnings season.


Earnings season is a time when all publicly traded companies must show their financial results to the investing public.


It happens four times a year and we'll usually witness incredible moves - both higher and lower.


Many of my readers, including myself, would like to be able to capitalize on those large moves. Problem is, we have no way of knowing ahead of time if the stock is going up or down after the report is out.


If you lean to one side, i.e., get long, and the company craps out, you're stuck with a fast losing trade. If you decide to short a stock before earnings and it explodes higher, you're looking at potentially unlimited losses. That's scary!


So should we just crawl back into our holes and accept that fact that we'll never be able to take advantage of these opportunities, or should we discuss an incredible option trading strategy that is made especially for earnings season?


I say we discuss. Yes?


"Strangle" Is The Name Of The Game


Option strategies have weird and funny names, don't they?


I didn't make them up, but the strangle could be your best friend during earnings season.


Why?


Because it is an option strategy that can make big profits no matter which way the stock moves.


How?


By buying both a call option and put option at the same time. Genius!


Since call option buying is a bullish strategy and put option buying is a bearish strategy, you are essentially covering both sides of the trade. And if the stock moves far enough in either direction, you can walk away a huge winner.


Although I'm not a huge fan of option-buying strategies, and that we execute put-option sales in my Smart Option Seller newsletter, I like to give my readers an extra bit of love by offering other "unofficial" profit-making opportunities from time to time. We've employed the strangle a handful of times, some of which were very successful.


Here's How It Works


Pick a stock that has had large moves in the past after its earnings are announced. This would typically require a quick glance at its stock chart over the past year or so.


Take a look at this chart of Target (TGT):



You can see the many gap moves in TGT during this span in 2016-2017, most of which occurred during an earnings announcement. Both gap ups and gap downs occurred, but more gaps were to the downside.


This is key when using the strangle strategy, because you want to hone in on a stock that has the capability to move a big distance. It's not recommended on stocks that are quite stable and have a history of small moves around earnings.


In order to play a trade like this, you would want to buy the nearest-term expiration out-of-the-money (OTM) call and put options that are relatively cheap within the distance of the recent gap moves. And by relatively cheap, I mean options that cost $.25 per contract or less. That's my version of cheap.


In this case, the maximum cost would be $50 total investment if buying just one call and one put option contract. Buying ten of each would be an outlay of $500. You choose your wager.


Now, which strikes should be bought?


You want to key in on how far a stock typically moved after prior earnings announcements. In this case, we can see TGT tends to gap higher or lower by as much as $5 per share in many instances.


Once you have an idea of how far the stock can move, you then scan through the options contracts to find those cheap options that are within, or close to, a $5 radius (in TGT's case) of the stock's current price before earnings are announced.


Make sure you use the closest-dated expiring options. Many stocks have weekly expirations, so if the company announces earnings on a Tuesday for example, you would pick that Friday's expiration. This would give just a few days to see the trade play out. That's all the time you need.


The reason we target the nearest expiration is because those are the cheapest options on a dollar basis.


Since these speculative trades can have a high degree of expiring worthless, we want to use the cheapest priced options. This way, if we lose, we don't lose too much.


Here's one of our best earnings trades that we executed in the Smart Option Seller on this exact Target trade.


On February 27, 2017, I alerted my readers to buy as an "unofficial" trade, the March 3, 2017 $60 put options for $.05 per contract. This trade cost just $5 in total. 10 contracts would cost $50, and 100 contracts would cost $500.


Although we only bought the put options in this case, we could've easily purchased the $73 strike call options as well for $.05 per contract. This would've been classified as the TGT March 3, 2017 $60/$73 strangle for $.10 per contract debit.


Since the whole strangle would've cost $.10 per, it only would've been a $10 loss if the options expired worthless.


How Do You Make A Profit?


Here's how it has to work in order for the strangle to pay off.