Those of you who are some what active with trading, if at all, in your 401(K) retirement account or any other account for that matter are probably aware that the earning season is on in full swing. What it is, is each company will announce the quarterly earnings per share (eps), the revenue for the quarter, the forecast for the year and the upcoming quarter. The Apple (APPL) reported a disappointing earnings and the revenue in 13 years, which did not meet Wall street analysts expectations, missing on both of them badly on 4/26/2016 after the bell and as a result the APPL stock got pummeled and dropped 8% overnight from $104 per share to $96. As APPL has 5.48 Billion outstanding shares, that was a drop of $45.49 Billion in one day in terms of market capitalization. Two days latter on 4/28/2016 Amazon (AMZN) reported stellar earnings which blew past Wall street analysts expectations by leaps and bounds. This resulted in AMZN stock jump from $602 per share to $666 per share overnight. As there are 470.90 Million outstanding AMZN shares, the gain in market share jumped up by $30.14 Billion overnight.

Great. What’s in it for us?

As a trader, by buying a simple 1 contract (= 100 shares) Option called ATM (at the money) PUT at $104 for APPLE just before earning announcement for $3.27 a share, and selling the PUT for $8.00 a share the next day, 136% return on investment (ROI) was made in one day which is 49, 536% annualized. Net profit after commission is $455.50 in one day!

Two days later, by selling an Option called Bull Put Spread (BPS) at the strike prices $567.5 and $ 565 for 10 contracts, $800 in premium was collected. Next day AMZN moved 10.6% up to $666 after the earnings announcement which made the BPS to expire worthless. Therefore $800 is mine to keep for good.

The next day, that is today, after AMZN reached its high, I sold another Option called Bear Call Spread at the strike prices $692.5 and $690.0 for 10 contracts, to lock-in another premium of $610. Today the AMZN went south so that the options expire worthless at May expiration, so that I get to keep $610 for good. This trade along with the BPS gives a ROI of 55.4% in a day, 20,221% annualized.

Net profit is $1385 in one day!

The reason why the Options trades produce enormous returns is because of the leverage it gives. 1 APPL contract of 100 shares that costs $327 controls $10,400 worth of APPL stock. 10 Contracts of AMZN spread controls $666,000 worth of AMZN stock! Notice, APPL lost $45 B and AMZN gained $30 B respectively in their market shares in one day. Regardless of win or lose or neutral, by using the appropriate options strategy you and I can always win. That’s wherein lies the power of Options besides the leverage it provides. You and I could double the number of contracts to double the profits . It’s Scalable. Is your day job scalable? Day job is just trading hours for dollars, That’s all.

Big shots like Warren Buffett and George Soros use the simple options strategies to collect huge amounts of premium. Buffett collected $7.5 Billion premium for selling the PUT option upfront when he bought Coca-Cola shares; 40 Million of them.

Risks

What is the worst thing that could happen?
For the APPL trade I could lose $327 but I can gain $455.50; reward to risk ratio is 1.39.
For the AMZN trade the reward to risk ratio is 0.554, and I could lose $2500.

To put that in perspective, if you invest your money in CD or Money Market, the annualized ROI is 1.4%! Pathetic. Compare this with 136% in one day!

So the success formula was:

1 Bad Apple + 1 Excellent Amazon = 1 Mortgage Payment + Instant Cash

Earnings season is a Cash Cow for a smart trader/investor. I could have played Facebook, Twitter, Netflix, Google, Tesla and Chipotle Mexican Grill, so on and so forth. The opportunities are endless.

You could get out of the rat race if you could do this consistently. I was able to replace my one month’s active income by my passive trading income using my assets meaning money works for me instead of me working for money. That’s a 100% raise if you still have the day job! Isn’t that what Financial Freedom is all about?
Hats off to Capitalism, Free Enterprise and Entrepreneurism.

“Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.”

-Warren Buffett.

Please tune in to Buffett’s Berkshire Hathaway Annual Shareholders Meeting live from Omaha, Nebraska on Yahoo Finance! for free tomorrow 4/30/2016 10 AM if you would.