Most Traders Avoid Earnings Because of the Risk. Liz and Jenny Use This 3-Rule System Instead.

Key Concepts

• Earnings Diagonal: A defined-risk options strategy used specifically around earnings announcements.
• Expected Move: The market’s projected price range for a stock following an earnings report, visually represented by a vertical bar on the trading platform.
• Defined Risk: A strategy where the maximum loss is limited to the debit paid to enter the trade.
• Width of the Spread: The difference in strike prices between the short option and the long option.
• Option Cycle: The expiration timeframe for options contracts (e.g., this week vs. next week).

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1. Methodology for Setting Up Earnings Diagonals

The presenters outline a systematic approach to executing an earnings diagonal, which can be applied to any stock with an upcoming earnings event.

Step-by-Step Process:

1. Identify Earnings: Use a tool (like Twitter or a financial news feed) to identify stocks with upcoming earnings (e.g., FIG, AMAT, NU).
2. Determine Direction: Decide on a bullish or bearish bias.
3. Select Short Option (This Week): Go to the current week’s option cycle and sell an option at the "expected move" price.
4. Select Long Option (Next Week): Go to the following week’s option cycle (e.g., 8-day expiration) and buy an option at the "at-the-money" strike price.
5. Evaluate Cost: Calculate the width of the spread between the two strikes. The goal is to pay less than 50% of the width of the spread.
   • Note: If the trade is executed earlier in the week (Monday/Tuesday), the cost is typically lower (around 33% of the width) because more time value is priced into the short option. By Thursday, the cost approaches 50%.

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2. Real-World Application: FIG (Figma) Example

The presenters walked through a live trade setup for FIG:

• Expected Move: $2.93.
• Short Call: Sold the $23 strike (aligned with the expected move).
• Long Call: Bought the $20 strike (at-the-money) in the 8-day cycle.
• Spread Width: $3.00.
• Cost/Risk: $1.30 ($130 total risk).
• Profit Potential: If the stock is above $23 after earnings, the spread can be worth $3.00, resulting in a potential profit of $170 against the $130 risk.

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3. Key Arguments and Perspectives

• Risk Management: The presenters emphasize that earnings diagonals are "defined risk" trades. The maximum loss is strictly limited to the premium paid to enter the position.
• Capital Efficiency: Compared to selling a naked put on high-priced stocks (like AMAT, which might require $8,000 in capital), the diagonal spread is significantly cheaper and requires less capital, making it more accessible for smaller accounts.
• Timing Sensitivity: The presenters note that the cost of the diagonal is highly dependent on the day of the week. Because the short option has only one day of life remaining on a Thursday, the trade is more expensive than it would be earlier in the week.

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4. Notable Quotes

• "Whatever we pay for it is the risk. So, here we paid a $1.30, so $130 is our risk." — Explaining the defined-risk nature of the strategy.
• "The diagonals will be cheaper than selling a put to put a bullish trade in." — Highlighting the capital efficiency of the strategy for expensive stocks.

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5. Synthesis and Conclusion

The earnings diagonal is presented as a tactical, lower-capital-requirement alternative to traditional directional options strategies. By selling volatility in the immediate term (the expected move) and buying time in the following week, traders can create a defined-risk structure that benefits from a stock moving in a specific direction following an earnings announcement. The strategy relies heavily on the "half-width" rule—ensuring the entry cost is no more than 50% of the strike price difference—to maintain a favorable risk-to-reward profile. While effective, the presenters caution that the cost of the trade fluctuates based on how close the earnings date is to the expiration of the short option.