By: Nic Chahine

Here is the statement that always spurs heated debates:

“Investing going into a company’s earnings report is gambling!”

Traders cannot predict how the markets will react to earnings reports regardless if the quarter is a miss, meet or beat with raised or lowered guidance.

Analysts may be able to nail the numbers spot on but they can’t tell you how the markets will interpret the results. Traders sold Google (NASDAQ: GOOG) at one point because of the word count of their CEO.

This doesn’t mean that traders should stay completely shut out of earnings events. Thanks to the option chains, traders can still participate in the earnings with lotto style trades. Those are trades with minimal costs, well-defined risks and a decent return when they hit.

A good candidate for such lotto earnings trades is crowd favorite Lululemon (NASDAQ: LULU), the so-called yoga pants maker. The products are pricey, yet have a cult following. Some of the stores don’t even have the name on the building, just the logo. They are to yoga pants what Apple (NASDAQ: AAPL) was to the music industry.

[Learn more from Nic by click here…]

Lululemon reports earnings before the market opens on September 12. It is still too early to pick a stance on the stock, but traders can start working on the set up. The one-year chart below clearly shows why lotto trades in Lululemon have a good chance of working well. Those who guess the direction correctly can collect a pretty penny.

Meanwhile, here are a few points of contention to consider before trading earnings lotto style:

▪    A good earnings lotto trade includes:

▪    A stock with violent reactions to earnings releases
▪    A stock with weekly options (though not a requisite)
▪    A stock that has decent options volume
▪    Defined risk usually nothing more than the price of the option position

The direction decision: this is the coin flip moment! Traders have one chance at calling it right.

▪  One can go with the flow and take the same position as the market expectations

▪ Once can go against the grain and take a contrarian position to market expectations
▪  One can also pull a Constanza: make the decision and then take the opposite direction (it recently worked for me on CRM earnings)

The magnitude of the move: Equally as important as guessing the direction of the move is guessing its magnitude. It pays nothing to correctly guess that Lululemon will fall on earnings, but choose a trade that is so far out of the money that it won’t participate in any meaningful options premium appreciation after the move.

Recap: to hit the earnings lotto trade with a proven earnings mover, traders need to guess up or down (that’s a 50/50 chance). Although traders need to also choose a good level, the chances for success are still darn close to 50 percent.

A skeptic might ask: “why would investors not want to buy a real lotto ticket instead and have a chance at millions?” The answer is simple: a 50 percent (ish) chance of loss (here) is way better than 99.99999 percent chance of loss with a ‘real’ lotto ticket.

Nicolas Chahine is a former CFO for a successful web startup. He now manages his own fund, which is built around his credit-spread trading strategy. He is the mind behind the “[Mastering Credit Spreads]” online course and “[Create Income with Credit Spreads]” newsletter on Marketfy.com.

[Nic’s offering to buy half the cost of your first month’s subscription of “Create Income With Credit Spreads” newsletter. He’s that confident!]

[Click here to learn more!]

Guest Post 

As a financial trader, you will know that the key to success and profitability lies with adaptability, and the ability to recognise trends and their potential impact on the market. We live in changeable economic times, and as an investor your portfolio must reflect the evolutionary nature of the global climate and the financial market’s enhanced level of volatility. In the quest to optimise profitability and secure long term gains, however, it is also important to remember that there are some investment staples that should feature as part of your trading portfolio.

Investing in Stocks: What to Look for in 2013

Stocks are a fundamental aspect of financial trading, even in a world of diverse financial products and high liquidity. Trading them can be challenging, however, so it is worth addressing their suitability as an investment option in the current climate: –

The Benefits of Uncertainty

While uncertainty is known to trigger market volatility, this can actually be positive for some investors. More specifically, macroeconomic instability can often trigger a fall in stock prices, creating reduced valuations that are enticing to experienced investors. This is especially true when the prices of established stocks fall, as a period of economic growth will soon drive these prices up towards their typical market level. If you have a long term outlook, then investing in low valuation blue chip shares can deliver significant returns.

The Global Market and its Benefits

While U.S., UK and Eurozone stocks may currently be under performing, this does not mean that this investment model is moribund. Instead, traders simply need to look further afield in their quest for profit, as developing economies in Asia, Central America and Eastern Europe continue to gain in  popularity. China offer a particularly prominent example, as gathering economic gloom and negative data has diminished GDP growth and triggered record low company valuations. With growth expected to resume as the global recovery gathers pace, however, those who invested when stocks were low are set to make considerable gains.

Consider Market Alternatives

Whenever you appraise an investment option, you cannot make a sound decision without first considering alternative options. The financial market is awash with innovative derivatives and products, and each of these have their own benefits and drawbacks in the existing economy. Before you commit to investing in stocks and shares, it is crucial that you thoroughly evaluate the market and select an option that best suits your needs. Currency and precious metals are all viable alternatives, especially if you wish to maintain a diverse and profitable portfolio.

The Bottom Line

Regardless of your level of capital or investment philosophy, stocks represent a traditional trading vehicle that can deliver genuine returns. They are not suitable for everyone, however, as only those in the market for long term financial gains should look to invest their capital into global stocks and equities. To understand more about the stock market and alternative investment options, visit www.alpari.co.uk.

Guest Post

I am always impressed by traders’ emotional attachment to their positions. I too at one point was passionate about the companies and indices I bought and sold.

It took a while but after being betrayed over and over again (and losing lots of money) from these companies, I woke up.

I was not going to be successful by attaching myself to a company that I had no control over. So I embarked on a search to find a way to consistently profit in the market, just like I’ve seen many others do. I wasn’t looking for a “get rich quick” scheme, but I wanted a strategy that would allow me to remove my emotions from the process. I had reached my tipping point and my emotions could no longer be another derivative of the market.

I played around trying different models and methods, all with the effort of finding something with consistency. I wanted to build wealth over time, not win the lottery.

I was then introduced to trading Credit Spreads. If you’re unfamiliar with Credit Spreads, then you need to start googling or reach out to me asap (contact info below), so that you can quickly become familiar.

In the most simplistic terms, I sell an option spread and take in a premium. If my thesis is correct, then I get to keep the premium.

Let me give you a real example that just played out over the last couple weeks for me:

I took a trade long VISA via a credit put spread Aug 170/165.

For this trade I took in a .24 in premium.

I also sold a 170/165 put spread expiring this week (Aug, 16, 2013). Visa was 181 at the time I took the trade.

If this was Friday already, then I would have profited the whole .24 premium that I took last week.

During my investment, all I cared was that Visa did absolutely nothing. I needed it to stay right about where it was and away from my short leg of 170. It could go to the moon for all I care as long as it didn’t crash. It can even go down a bit and I wouldn’t care too much either.

The most important point is that I am completely unattached to the company from an emotional perspective. I’m not even too worried about reading the latest news on the company. I just have to keep an eye on my spread.

Now, I’ll be repeating the process for September and going long on VISA with another credit put spread. Below, you can find the new credit spread trade that I made for VISA and you can follow along as it plays out.

You can find this trade and a whole lot more on my site. If you want to reach out to me, then subscribe to my premium alerts and analysis newsletter. Everyone who subscribes has direct access to me on a real time basis. No question ever goes unanswered.

I’m so confident that this will not only improve your returns but also improve your life that I’d like to buy half the cost to your first month.

Click here to learn more.

In the meantime, here is the trade that I am now taking for Septemeber:

SEP VISA credit put spread 160/155 (so sell 160put and buy 155put behind it).

• PAYOUT: Paid me .34 per contract. Now it pays about .28
• CHANCES: 92% chance of complete success (where I keep the whole .34)
• PAD: the buffer from current price to short strike of 160 is about 10%
• NOTES:
  • Has recently been tested so I feel like we got a peek at worst case scenario of 170ish
  • Has a void under its well-established up channel in 2013. This scares me a bit BUT
  • I am going down with my position to the 200day moving average, which has not been tested in over 2 years.
  • Also, we have the 100-day moving average, which has served as solid bounce level. So, unless the markets fall apart Visa should hold up.
  • Furthermore, the second smaller chart below shows the market profile, which tells me that markets price action thinned out at 171 recently. This gives me further support.

  

• RISKS: this seemingly slam-dunk way of generating income comes with risk. The good news is that it’s defined risk. In this case it’s $5 less the premium taken in. Now this sounds big BUT the risk of loss is smaller than any other form of trading that I know. Where else can you get a 95% theoretical chance of success on your trade?
• 
  HEDGE: Also, I intend to add a hedge to my trade by adding a short position to this long thesis. I plan on shorting VISA via a Sep Credit CALL Spread at 200. For this I collect an additional .23 so the total trade will bring me .50 with a 95% chance of success. All I need is for VISA to stay between 160 and 200 until mid September.
• RISK MANAGEMENT: all along the way, I monitor the trade not to let it out of control. I can adjust it up or down or even buy it back should I find that my thesis is no longer valid.

Nicolas Chahine is a former CFO for a successful web startup. He now manages his own fund, which is built around his credit-spread trading strategy. He is the mind behind the “Mastering Credit Spreads” online course and “Create Income with Credit Spreads” newsletter on Marketfy.com.

Nic’s offering to buy half the cost of your first month’s subscription of “Create Income With Credit Spreads” newsletter. He’s that confident!
Click here to learn more!

THIS IS NOT A TRADE RECOMMENDATION OF ANY SORTS. THIS IS MY TAKE ON A FEW FACTS SURROUNDING THE TICKERS I MENTIONED. TRADING OPTIONS IS DANGEROUS AND CAN CAUSE TOTAL DESTRUCTION. I ONLY RISK MONEY I CAN AFFORD TO LOSE. EVERY TRADE HAS THE POTENTIAL TO BE A COMPLETE LOSS AND WITHOUT NOTICE.