While earnings season is always dramatic, the first quarter earnings season in 2019 could be especially interesting.
One big reason for that is because of the recent 90-day "truce" that was called between the United States and China in the ongoing "trade war." In order to help facilitate orderly negotiations, the two countries pledged to avoid escalating the conflict while attempting to complete a deal - a negotiating window spanning from early December through the beginning of March.
While that type of "good faith" gesture may ultimately help produce an agreement, it also sets up a potential "binary event."
The term binary event generally refers to a news development which causes a big move in the underlying price of a financial asset, or a group of financial assets (or all of them). Such events can be anticipated/expected on the calendar (like the deadline for the trade war negotiations), or they can be materialize out of thin air, in unexpected fashion.
Given how quickly markets have reacted to positive and negative news developments related to the trade war in recent months, it's possible that a big move could be on the horizon sometime before the negotiating deadline - especially if no agreement is reached.
In terms of the upcoming earnings season, the timing of these trade negotiations is of particular interest. The 90-day negotiating window is set to expire in early March, which means that news related to this potential “binary event” could come at any time in February.
Looking at the expiration cycle for options in 2019, one can see that most earnings events will occur in the February or March expiration months. The same months that would theoretically capture any “big news” related to the trade war.
In sum, that means that if you decide to trade earnings during the first couple months of 2019, that position may encompass not just one binary event (the earnings announcement itself), but another one as well (the trade war announcement).
For some traders, this may be a reason to be especially cautious in the near-term - possibly avoiding earnings-focused trades altogether. For traders that decide they simply can't sit out the earnings season, the backdrop of the trade war may cause them to target only defined risk positions - those structures which eliminate the potential for "unlimited losses."
If you are interested in learning more about how you can protect your portfolio during the upcoming earnings season, a new episode of tasty Bites is definitely worth a few moments of your time.
On this installment of the series, the hosts highlight several defined risk position structures that can help reduce risk during earnings season. While the show focuses on small accounts, the position types discussed on the show may also be of interest to traders with large accounts that want to limit their exposure during the first quarter earnings because of the risk of a second binary event.
For a full breakdown of this topic, we hope you'll take the time to review the complete episode of tasty Bites when your schedule allows. Traders looking for more information on how a “normal” short premium trade compares to a short premium trade that targets earnings may also want to review a new installment of Market Measures.
If you have any questions about trading earnings, or any other topic, don't hesitate to leave a message in the space below, or reach out directly to @tastytrade on Twitter or firstname.lastname@example.org (email).
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.