Dawn Pennington

Learning the Earnings Cycle

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RTH is one of many optionable ETFs available to trade when you want to invest in an industry instead of a number of the individual names -- this can not only save commission costs, but it could also protect you against "overweighting" your portfolio with too many names in one sector.

Conversely, if a company greatly surpasses estimates, investors can also punish the stock by selling. It may seem counter-intuitive, but many investors worry that a blow-out report means the company has hit an earnings apex and will be unable to sustain such high numbers in upcoming quarters.

Again, check to see whether the company has cyclical earnings or if it enjoyed an exceptional one-time boost from the sale of a holding or a new product launch, for example. If that's the case, it's likely that the next quarter's earnings will also be strong, so it can pay to buy call options at a discount.

Either way, it's difficult for options traders to use earnings surprises to time the purchase or sale of options. What can be more successful is for options investors to use forward-looking information and forecasts from earnings reports to set up their longer-term options plays with LEAPS.

Generally, establishing an options position at least three weeks prior to an earnings announcement will ensure you get in before any pre-announcement news potentially inflates the options premium.

Knowing when to sell, however, is a bit trickier.

If an option's value suddenly plummets after an earnings announcement, the amount of time left before expirations will be the key to determining your next move. If there's at least three months until expiration, you may benefit from holding the option to see whether it will recover. Otherwise, you may be better-served to bail out of a losing position to quell losses and recoup any remaining value while it still exists.

Earnings season can bring a bevy of buying opportunities, as well as discount delusions -- just remember that a good deal isn't always a good deal. Be sure to look at the time premium available for each option and take advantage of a company's earnings forecasts for upcoming quarters.