Earnings Play of the Day: NetApp

 | May 21, 2014 | 1:30 PM EDT  | Comments
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Stock quotes in this article:

crm

,

ntap

While small-caps came out of the gate fast this morning, they are failing to hold up their end of the bullish bargain now. I've said it before and I'll say it again: If the market is causing you headaches, you do not have to trade it right here, right now. I continue to focus on pre- and post-earnings plays. I've found them much more predictable than the overall market. Yes, I realize the irony in that statement. It's almost concerning.

The post-earnings trade Tuesday was focused on Salesforce.com (CRM): "The better trade on CRM seems to be the follow-through on the opening move. A lower open has been good for a continued move lower and a higher open has been good for follow-through to the upside. The last three reports have been worth a 5% follow-through from the open, so it's certainly worth noting."

Well, the stock did open lower. It wasn't hard to catch a short between $52.60 all the way up near $53 right after the open this morning, and the stock has since fallen just like before. Even with technology stocks strong, CRM is down more than 5% from an opening short. Time to book profits and look to the next trade.

NetApp (NTAP) has patterns around earnings worth watching. Whether the stats and charts are backward-looking doesn't bother me if they work. The patterns have held true much more than they've failed, so I believe it is worth continuing the same analysis. The chart on NTAP has been in a very steep downtrend. Resistance is clear on the daily chart. It is quite possible it breaks out today with a good report. Still, I put the upside around $36.50 while I see support between $33.30 and $33.50. This is a tight range and below the 5.4% implied move options are currently pricing.

NetApp (NTAP)
Source: StockCharts.com

Looking at past action, this actually isn't surprising. NTAP has opened below the implied move for four reports in a row now. Selling the straddle has worked well whether you close it at the beginning of the day or wait until the close. Waiting until the close has actually been the biggest winner. Therefore, selling straddles, strangles or using iron condors is my preferred pre-earnings trade. I still don't trust this market, so using a short May 23 $35 call and $34 put married with long May 23 $37 calls and $32 puts for a net credit around $1.03 a consideration. One other approach would be ratio trades where I would go long 1x May 23 $34.50 straddles and short 2x May $33 puts/$35.50 call strangles for about $0.18 to $0.20. I actually prefer that trade more.

Post-earnings, the fade has been the play. The stock has closed flat once while the other three times playing the opposite direction of the open has been a winner, averaging a little more than a 3% return for the intraday trade. The maximum drawdown on the trade intraday is averaging less than 1% -- certainly worth a look.

I say this every day, but I will wait until the last hour of the day to place the trade. There has just been too much movement in the markets to do otherwise.

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