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Earnings

Monday, July 24th 2023

Scan for Earnings Trades This Week Using ORATS Theoretical Values

This earnings season, use the Option Scanner to quickly filter thousands of trades and find the best one for your strategy.

Summary

ORATS' Option Scanner can be used to browse, filter, and sort through thousands of potential earnings trades. By selecting up to six different strategies and applying custom rank weightings, traders can efficiently narrow down scan results to a few top trades. The theoretical edges provide increased confidence and clarity so that you can discover exciting trading opportunities during earnings.

As we find ourselves amidst the earnings season, this week brings many big names into the spotlight. With ORATS' new Option Scanner tool, we can browse, filter, and sort through thousands of potential earnings trades. Here's an in-depth guide to using the scanner for optimal results.

Setting Up The Scan

Upon launching the Option Scanner, you are greeted with the option to add up to 25 symbols simultaneously, all of which are processed quickly and efficiently. For our demonstration, let's add five big names reporting earnings this week: Meta, Visa, Google, Amazon, and Microsoft.

If you have a specific market outlook regarding these stocks, you can specify it; for this scan, we will maintain a neutral stance. Although importing symbols from a stock scan is possible, we have chosen to add these symbols manually.

Choosing and Configuring Strategies

The next step involves selecting up to six different strategies—be they bullish, bearish, or neutral. For this scan, we will choose two of my favorite neutral strategies: the iron condor and the iron butterfly, while removing the default long call spread.

One of the unique features of the Option Scanner is the ability to view and modify the settings for each strategy. This flexibility extends to various parameters like days to expiration, strike deltas, among others. By default, the strategies are set to expire a month away, but we can easily change this using the intuitive interface. Let’s target trades expiring Friday so that we can capture the earnings move, but leave little time to expiration after that.

The Power of Rank Weightings

Once the strategies are in place, the system rapidly churns out over 2000 trades across the chosen strategies and scanned stocks. Here's where things get really interesting—introducing the powerful tool of rank weightings. This feature helps us to efficiently sort through the numerous trades, narrowing down our options to a few top trades.

Rank weightings employ three robust proprietary indicators developed at ORATS—Distribution (D%), Forecast (F%), and Smooth (S%)—collectively known as theoretical edges. A theoretical edge evaluates whether a trade is over or undervalued by comparing our theoretical price to either the trade's mid price or the minimum margin of $0.375, whichever is greater.

  • D% or Distribution analyzes the historical price distribution of the underlying stock in a similar volatility environment for the remaining trade days. By overlaying the payoff picture of the options trade onto the distribution, we can calculate the expected value at each node, which when added together gives us a theoretical value.
  • F% or Forecast constructs a forecast of the options volatility surface, using historical and current observations of the strike skew slope, derivative, curvature of the skew, and any necessary earnings effects.
  • S% or Smooth draws a smooth line between the put and call volatilities, lining them up using a residual yield that factors in the appropriate interest rate assumptions, dividend yields, and put-call parity.

These theoretical edges, when positive, indicate a potential benefit for the trader. They provide increased confidence and clarity when comparing trades.

Applying Theoretical Edges

Back on the Option Scanner, it's time to apply these theoretical edges to our scan results. By setting rank weightings and prioritizing these theoretical edges above the other metrics, the scanner instantly re-sorts the table, highlighting the trades with the most beneficial edges.

Although filters can be set on the columns, the first trade that popped up in our scan—an unbalanced iron condor on Microsoft, with an 80% probability of profit—is a particularly enticing prospect.

Your views and feedback on this trade, or any other trade you find using this method, would be greatly appreciated. If you have any questions or need further clarification on the Option Scanner or any other ORATS tool, please feel free to email support@orats.com.

The power of strategic trading is at your fingertips with ORATS' new Option Scanner. Unlock the potential of the earnings season and discover exciting trading opportunities today!

Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.

Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.

Owners, employees, directors, shareholders, officers, agents or representatives of ORATS may have interests or positions in securities of any company profiled herein. Specifically, such individuals or entities may buy or sell positions, and may or may not follow the information provided herein. Some or all of the positions may have been acquired prior to the publication of such information, and such positions may increase or decrease at any time. Any opinions expressed and/or information are statements of judgment as of the date of publication only.

Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.

Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.

Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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