Another way to trade earnings season

Published Fri, Oct 9 201512:45 PM EDTUpdated Fri, Oct 9 201512:56 PM EDT

The unofficial start of the third-quarter earnings season got off on the wrong foot after Alcoa reported results well below estimates Thursday. Analysts on Wall Street predict earnings and revenues for companies in the S & P 500 will decline 4.5 percent and 3 percent, respectively, from the same period last year. But that doesn't mean there's no money to be made. Traders are putting on options trades that can win if certain securities rise or fall amid this tumultuous season. Based on options activity, MKM Partners derivatives strategist Jim Strugger identified ETFs that could be ready to move big on earnings and told CNBC Pro how to profit on those moves. By paying attention to options, traders like Strugger aim to get a reading of sentiment ahead of market-moving events. Earnings per share for the energy group, for example, are expected to drop 65 percent from the same period last year. However, open interest in the options market, a measure of how many contracts remain in play, shows that traders are not as "bearish/defensive" on the group, according to Strugger. Source: FactSet One reason for that, the strategist explains, may be due to the sharp drop in the ETF tracking the group, the XLE , which is already down 19 percent in the past year, but has recently shown some momentum. Likewise, the other two most actively traded energy ETFs, the OIH and XOP , also have options activity in line with the levels seen in the past year, according to Strugger. "Market perception seems to be that a 65 percent decline in 3Q EPS is largely cooked in," he noted. The best approach to bet on the group after the recent runup, according to Strugger, is to get long December 71/76 call spreads for $1.50. Read More Finding bright spots in a gloomy earnings season A shift in sentiment is also present for the materials sector ( XLB ), whose earnings are projected to show negative growth of nearly 15 percent. Source: FactSet Open interest for the group is down by more than 50 percent since late September, trading at a new multiyear low. "Investors now appear less prepared for a downdraft in the materials sector if earnings surprise to the downside," said Strugger. The strategist recommends buying December 42 strike puts outright either to hedge or as an outright directional short. On the contrary, options traders seem to bet that consumer discretionary ( XLY ), the sector with the highest EPS growth prospects in the S & P at 10.5 percent, will in fact outperform. Even though implied volatility is still elevated, Strugger says that he'd still buy December 80 strike calls outright for $1.11. Source: FactSet

Trader on the floor of the New York Stock Exchange.

Getty Images

The unofficial start of the third-quarter earnings season got off on the wrong foot after Alcoa reported results well below estimates Thursday.

Analysts on Wall Street predict earnings and revenues for companies in the S&P 500 will decline 4.5 percent and 3 percent, respectively, from the same period last year.

But that doesn't mean there's no money to be made. Traders are putting on options trades that can win if certain securities rise or fall amid this tumultuous season.

Based on options activity, MKM Partners derivatives strategist Jim Strugger identified ETFs that could be ready to move big on earnings and told CNBC Pro how to profit on those moves.