Bob Lang of Explosive Options: Why on earth would one want to risk capital over an earnings play? On the surface it seems that trade is like a 'date with death' rather than a 'date with destiny'. Implied volatility is normally at its peak just before an 'event' such as earnings. While option prices might seem bloated, option prices reflect the current amount others are willing to pay for protection- hence I look at high-priced options as valuable because people WANT them.

However expensive the options may be there exist some good opportunity within various strategies. Traders can start by looking at the charts and technical's on issues. This keeps the guess work out of the equation. If trends are favorable, the market cooperative and signals locked in then the process starts: Find the best probability trade. No guarantee of success, but play the odds and you'll hit more winners in the long run.

As a trend trader I use the leverage provided by options to achieve some big gains. However, it doesn't always turn out well. Just ask anyone who had a call play on Netflix ( NFLX) or ( AMZN) last week! I had a losing trade on NFLX call spreads prior to earnings, but I turned it around and entered a put spread on AMZN prior to earnings. ALWAYS define your risk -- what you are willing to lose. Is the reward/risk favorable in this situation, and could you recover from a total loss on the trade? This is the most important question to ask BEFORE entering the trade.

As stated above, there are different ways to play options with earnings, some with extreme risk (binary result) while others are more strategic and play the volatility. The most basic way is to buy a straight call or put. I will often do this simply when a big move is expected and I have a feel for direction. Let's say your read on stock post earnings is for a big move but are unsure of direction. In this case a strangle or a straddle would be the best move. On the other hand if options are bloated and the stock is not going to move that much afterward, the trader might want to flip this around and SELL the straddle or strangle.

The idea here is to best position yourself for a payoff based on the reaction. We don't care about the result of the earnings but what does the market think. Two weeks ago Juniper Networks ( JNPR) beat and guided down on earnings. The stock initially went lower, options fell as you would expect, but JNPR has risen 15% higher since. And yes, the at the money options are much higher, too. We often see these 'delayed reactions', so if you're only after instant gratification you can be sorely disappointed. If you waited then you got paid off. The rush to book profits is always there as the future is uncertain but when in this situation it's usually best to follow this mantra: 'Be right, sit tight'. Could we lose on these trades? Absolutely. Define your risk - KNOW how much you can lose and accept it.

Mark Sebastian of Option Pit: As Bob has clearly laid out trading options into an earnings report can be a very scary concept. However, if the risk/reward lines up and the trader is smart about risk management, they can be in a position to win big while hopefully only losing small. This makes trading earnings plays not nearly as scary as say, asking Jim Cramer what he thinks of the Andy Reid's clock management skills. Let's take a look at a 'scary earnings play' Bob likes: Bullish MasterCard ( MA).

Looking at Visa ( V) and American Express ( AXP) both had great earnings which could point toward bullish earnings in MA. This is where I often will get traders mentioning that the 'good news is priced in' sometimes it is, sometimes it isn't. For instance traders ahead of AMZN earnings sat there and watched Apple ( AAPL) and NFLX get smoked yet AMZN earnings were NOT priced in.

Looking at the options volatilities (the way a pro determines if options prices are bloated), we continue to have the same problem all earnings season. IVs are all higher in relative terms across the board because of the European situation and the US economy. As of Friday, MA 30-day IV was at almost the exact spot it was the last earnings cycle with one major difference:

In the last earnings cycle option IV rallied to get to 35%, in this cycle options IVs have FALLEN to get to 35%! Considering that realized volatility is trading at a considerable premium to implied volatility, I cannot fathom selling premium into this cycle.

Looking deeper, those 30 day IVs do not include the weekly options which are pricing a 5% move between now and next Friday. Because of what is clearly buying activity in the weekly options we are offered a considerable relative discount to move our time horizon back to regular November.

There are two plays that I really like. One I like is to buy the regular cycle and sell the weekly against it in a diagonal spread. The November 355 for $12.70 bought against selling the weekly 370 calls at $3.50 will perform marvelously if MA moves the 4%-5% the market is pricing in. If MA completely runs up, the trade will still win and if MA takes a nose dive we should be in a position to at least get some value form the November 355 calls or possibly hang on to the calls in the event of the dead cat bounce.

A play that I might like better that has a smaller cash outlay is the MA November 355/375/395 butterfly. Like the diagonal this play is short right at the level that the market is expecting. However, because this is a fly, it has a much smaller debit. The total cost of the fly around $4.00. Essentially, as long as MA doesn't drop $20.00, or more, the trade is likely be able to be flipped for a wash. If MA sells off slightly, rallies slightly or runs this trade will perform really well. If by some chance MA rallies $50.00 on November 2, we do begin to have some problems. This is the long downside of this strategy as I see it.

Trades: With MA Trading around $355, buy to open 1 MA November 355 call for $12.70, sell to open 2 MA November 375 calls at $5.00 and buy to open 1 MA November 395 call for $1.50.

Author's note: I just co-wrote an entire piece on MA without cracking a joke about the affect of my wife's shopping on their earnings.

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At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned. Bob Lang was long MA calls.