Savor Earnings Season for Stock-Picking

 | Jul 28, 2013 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

goog

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FB

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expe

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aapl

Earnings season is one of the best times for options trading. I know that may go against conventional wisdom, but allow me state my case.

I always approach trading in the same manner: The charts and technicals guide me to the best setups, and then it's up to me to find the best price and time combination for a nice payoff. It's irrelevant whether an earnings release is in the way of my thesis because, in most cases, the technicals will tell me where the price is heading. I don't game a stock over earnings, but there is a great advantage in trading around these reports if the technicals are aligned with the direction on which you're betting.

Recently, another advantage has been the lack of market correlation -- and you know what I'm talking about if you remember the post-earnings reaction in Google (GOOG), Facebook (FB), Expedia (EXPE) or even Apple (AAPL). While these names moved significantly, what the broad market did concurrently was even more interesting.

Google shares were blasted the following day -- but the rest of the market was up. After Apple reported a better-than-expected quarter, with the stock up a huge 5%, the market hung around the flat line. Then there was Facebook, which smashed estimates and vaulted 27% the day after, even as the indices looked to get creamed the next day. Expedia, finally, was hammered post-earnings this past Friday, yet the market squeaked out a win.

So it's clear stocks are moving on their own news and merit, and we're seeing little macroeconomic or broad-market influence -- and that's as it should be.

Should IBM (IBM) be punished after a stellar earnings report because news from Japan is creating market volatility? What if Coca-Cola (KO) misses? Should the stock shoot higher because the market is paranoid about risky equities and prefers safety names? As an options trader, I have to thread the needle in order to reap gains without the influence of noise -- and, since time is of the essence, I cannot afford to wait for that influence to subside. The clock is always ticking on option plays.

But, fortunately, we're generally in a "market of stocks" of late, rather than a stock market. That makes for a great stock-picking environment: If the charts and technicals are aligned with my thesis, I can quite simply use my skills to game a good probability trade.

The CBOE Volatility Index (VIX) is also down under 13% and has been trending lower. Needless to say, the market appears less worried about exogenous events, and there seems to have been quite a bid under stocks as a result.

This won't last forever, but for now I will take advantage and trade what the market is giving me: an opportunity to pick stocks.

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