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Strategies for gambling on earnings

October 23, 2014 by Cody Willard

Stocks thru the roof again today, wild volatility remains the theme. Still no trades for me today.

 

Now onto today’s report. I always call it “gambling” when I trade around earnings.

Trying to game earnings reports is one of the hardest and most volatile ways of trading. In fact, most technical analysts and many of the best traders I know abhor making a move when an earnings report is near. Long-term investors are best served by ignoring the often wild moves that a stock they own will make after an earnings report. That said, using a huge post-earnings selloff to scale into a stock you want to own for the long term is one of the best strategies for any investor’s playbook.

When you try to game an earnings report, you’ve got to get three things right:

1. What the fundamentals of the last 90 days have shaped up to and whether the reported result is going to be better or worse than expected.

2. Know what the sentiment around the stock and the expectation for that earnings report is. If everybody’s expecting blowout numbers that can set a bar that’s too high to catalyze an earnings report pop. Vice versa if everybody’s expecting disaster and a collapse. It’s a version of the buy-the-rumor, sell-the-news dynamic that’s often inherent in trading.

3. Figure out the best way to trade the reaction to earnings that you expect after the company reports. Sometimes you can buy some near-term call or put options to benefit from a huge post-earnings move. Sometimes the premium on those options are too high to mess with, so you’re better off trying to buy/short the common stock itself.

I’ll be applying these concepts to a few high-profile upcoming earnings reports during the earnings season. Our first featured earnings report analysis is for Microsoft and Facebook.

Microsoft:

1. Microsoft’s [wsj-quote ticker=”MSFT” name=”Microsoft Corp.” realTimeChannel=”/quotes/zigman/20493/lastsale” channel=”/quotes/zigman/20493/delayed” id=”quote_6929740″] got a new CEO and lots of backlog of revenue to book. We know too that Intel recently said PC sales have stabilized and there’s demand in the pipeline for more. That leads me to think the report itself will be “better-than-expected.”

2. The sentiment around the stock is mild, despite the stock’s being near ten-year highs. Despite Intel’s strong report last week, expectations are pretty mum for Softee into their report tonight.

3. Premiums on MSFT calls and the puts are rather cheap as the market doesn’t seem to expect any big move after Microsoft’s report tonight.

This all leads me to conclude that I’d rather be long than short Microsoft into tonight’s report. If I were in the mood for speculating and gambling, I might even look at the Microsoft November call options. I’d know that with any options trade, I could lose the whole nut that I bet on them with.

Facebook –

1. My analysis points to FB likely having monetized their user base much better than most analysts had modeled for the last few months. The video ads, app download ads and other means of generating revenue from users is catching a lot of traction very quickly. That leads me to think the report itself will be “better-than-expected.”

2. The sentiment around the stock is very positive and expectations have been ratcheted up over the most recent couple quarterly earnings blowout reports that FB delivered. Facebook’s got a high bar set for itself, but earnings could come in even better than most analysts expect?

3. Premiums on FB calls and the puts are probably too high to make them good risk/rewards.

This all leads me to conclude that FB’s reaction to its upcoming earnings report is way too hard to game and try to profit on. I’ll stick with my long-held Facebook common shares that I’ve owned since I was theĀ only idiot on the planet buying Facebook.

PS. Here’s the latest Cody Underground Podcast, where I talk Revolution Investing analysis for Facebook into earnings, Apple around dividends and why gold miners have no support.

Related posts:

Stock Market Bubble Illustrated
It's true that people actually trade off...
Recent Media Coverage
Cody Kiss & Tell: Search for yield, Apple expectations and more
WiNR Ratio Algorithm Analysis of Our Positions (while The Great Trade War gets real)
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Filed Under: Trading

Disclosure: At the time of publication, the firm in which Willard is a partner and/or Mr. Willard had positions in some of the stocks mentioned above although positions can change at any time and without notice.

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This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or cryptocurrency or token any other product or service by Cody Willard or any other third party. Furthermore, nothing in this is intended to provide tax, legal, or investment advice and nothing in this should be construed as a recommendation to buy, sell, or hold any investment or security or cryptocurrency or token or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

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