An Earnings Contemplation

 | May 01, 2014 | 2:10 PM EDT
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So many folks love earnings season -- all right, so maybe some of them love to hate earnings season, but it is still love. There are so many things to love about it. Some folks love the information an earnings release will bring. How was business? What's the outlook? What's working? What's not? All right, so maybe that's a dumbed-down version, but you get the point. Some folks just love the carnage, whether it be a long in a stock getting killed, a short in a stock squeezing higher or watching others squirm with options trades. It is their version of a disaster film -- love watching them, but never want to be the star. Still, some just want the thrill of making a huge trade. Your stock is popping 10% or that options trade that nets 500% overnight, or maybe selling a straddle that expires almost worthless the next day. Love it or hate it -- and you know you love it -- earnings season has a little something for everyone.

We are finally on the downhill slope when it comes to earnings, once we finish this week. Quite a few names tonight could be movers. A sampling of some big movers in the past year includes LinkedIn (LNKD), Akamai Tech (AKAM), Outerwall (OUTR), OpenTable (OPEN), and Expedia (EXPE). However, rather than looking at these names pre-earnings, I'm tossing up this chart of past moves to see how it may help me trade the names post-earnings.

While I view pre-earnings moves as hard to predict, and hard is an understatement, post-earnings reactions have a pattern I find a bit more reliable. Find a trade and then beat it to death is my view. Eventually, the trends change, so, as with any other trade (especially one that is driven by a recent catalyst), it is important not to view the trade as a sure thing and become overconfident or oversized.

For instance, when I look at OpenTable, I see it closed higher four straight times from the open. In fact, the stock has averaged closing 7% higher from the opening print, the last four reports. That doesn't mean the stock will close higher from the previous close; as you can see, it closed in the red in November 2013. But this leads me to conclude that I should be looking to buy the stock or calls or call spreads at the open. If I prefer a synthetic position, then selling at-the-money or even slightly-in-the-money puts at the open could be attractive. Unfortunately, the others are not quite as clear.

Akamai looks more like a name where you could buy the up opening and start selling on any gain of 3% or more while using trailing stops 1.5% above your initial buy. If the stock opens down, then I would not look to be a buyer. I would, however, consider shorting the stock on any move 4.5%-5.5% above its opening print and close at the end of the day.

Expedia has been the biggest mover in the group, so playing earnings in front of the number will appeal to many. Behind the number, it seems like a gap lower may result in a trend lower. Therefore, on a gap lower, I would consider a small put spread trade. Big gap-higher openings don't seem to get much follow-through, though, so buying intraday dips several percentage points below the open would be my only consideration there.
Finally, Outerwall, looks more like a fade play where I would consider shorting the opening and then adding to the short on any move above 2.5% over the opening print.

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