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How to Make Your First $1000

Trading this Option Strategy
Geoffrey A. Smith

One of my favorite things to do is trade a stock after earnings. Stocks have a tendency to have one of
their largest moves once their earnings are out. Most of my plays are on the options for those stocks,
but at times I do trade the stock itself. Once of my favorite stocks to trade off earnings is Amazon.
Over the years it has gotten a little pricy, but it is still a good stock to play.

The key to this strategy is patience. Patience to enter and patience to get paid. Amazon announces
earnings after the closing bell (after 4pm ET). So, trading the options will have to wait until the next
day. Some may think that is too long to wait because the big move is already over. I disagree. The
move they had on the earnings announcement is a big move, but that is what sets up the trade.

What we want is a BIG move in Amazon. At its price of over $2400 (at the time of this writing), a 10%
move is $240, and 5% is $120. A 5 to 10 percent move is very normal for any stock off their earnings.
This is what we want to see. If Amazon only moves 1 to 3 percent, then the trade probably is not worth
it. So, the first thing in the check list is for Amazon to move at least 5% off their earnings.

Next, we need to see what Amazon’s (symbol AMZN) overall trend is; up or down. It will have a tendency
to stay in that direction regardless of how the earnings come out. The key to looking at the overall trend
is that we want the earnings go opposite of the trend. If the trend is up, we want the earnings to sell
it off (bad earnings), and if the trend is down, we want the earnings to make it rally (good earnings).

The reason for this is because we are going to trade opposite the earnings move. If the earnings are
bad and the overall trend is up, I am a buyer. If the earnings are good and the overall trend is down, I
am a seller (or buyer of puts). The tricky trade is if the earnings drive AMZN in the direction of their
trend. If the trend is up and the earnings are good, they will be way up, and same to the downside.

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In Chart 1 below (daily chart of AMZN), circled is the day that AMZN had earnings (4/30/2020). Noticed
it gapped down because of them. The overall trend had been higher, yet the earnings pulled them
down. That is a good thing. Notice the open (top of the red body on the candle stick in Chart 2 labeled
1) on the day after earnings. That is VERY important. The reason is that if AMZN is going to go back
up, it will need to be above that open. As long as it stays below that open, it is still negative. In Chart
2 (daily chart of AMZN), bar 2, is still below that open. Then on day 3, it goes above it. Trigger time.

The open of the bar 1 in Chart 2 is 2336.80. I like to go about $30 out of the money on the option,
and good month out in time. So, I start looking at the 2370 calls. WOW! Those are expensive at $54
($5400). We can reduce the cost buy using a bull call spread (debit spread). So, I look at the June 19
2370/2420 call spread. The cost is $20 ($2000). Now that I can stomach. Notice that it is a $50 spread
and I am paying $20 for it. That means that my maximum gain will $30 ($3000) if AMZN is above 2420
on expiration day. My maximum loss is the $2000 I paid for it. If AMZN goes below the 2256.38 low
it made after earnings, I will bail the trade and take a loss (but not the full $2000).

Chart 1

Chart 2

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So, now I am long a 2370/2420 call spread that I paid $2000 for, and it expires on June 19, 2020. If at
any time I can get 2/3 of the maximum profit ($2000) I will exit the trade. That is a 100% gain on the
option spread. I paid $20 for the spread and put a sell limit at 40.10 good until canceled (the extra
$10 is to pay the commissions in my mind). Now I must wait, either it pays me my $2000 or I exit the
trade if it gets below the 2253.38 low it made after earnings.

It took almost a whole month for AMZN to get above $2500 and pay me my $2000. This is typical. It
will usually take 20 to 40 days to get paid on this. It will have many ups and downs during that time,
but I know where my profit target is and my risk. If neither have been threatened, then I am content
to keep holding. Remember I said you must be patient in this trade? It took 3 days to enter the trade
and another 21 to get out at a profit.

This can be done on any stock after earnings. The thing to do is wait the first hour of the market after
the earnings are released to let it clam down from the “earnings reaction”. The NASDAQ stocks tend
to react better than the others, but the others do pretty well. Just keep in mind that the stock needs
to move 5 to 10 percent to get a good “rubber band effect”.

At DTI, we cover trades like this every day, and once you get the hang of it, these setups are easy to
spot. You will learn exactly how to identify opportunities like the Amazon trade as well as many other
trades in the stock, options and futures markets.