Roll the Dice on Vipshop, or Play It Safe With Target

A look at 2 very different plays into earnings.

Direction predictions for earnings are difficult, and often near impossible to repeat on a consistent basis. Trading stocks into earnings results in wide swings, big gains, big losses and lots of emotion.

Consistency and risk management are keys for surviving and prospering in this business, and earnings often offer very little in either category. I have moved away from heavy directional trading, although I will still make smaller directional trades when I feel the risk-reward warrants it. And technical analysis isn't as big a part of my earnings trading as it once was. I've found more use for TA in options pricing, statistics, regression analysis and past results.

Although I still consider current setups in the charts, I am looking more to sentiment, along with cohesion between support or resistance levels and the aforementioned factors. This often results in trades anticipating a certain size, rather than a specific direction. While the overall return in such trades are often low to moderate, success rates have been higher.

I see a lot of Home Depot (HD) in Target (TGT), right now, in terms of expectations. Over the past seven reports, we've only seen one exceed tonight's expectations of 4.5%. While the trend is flat, it is really showing little relationship, so rather than rely on statistics here, I am looking more at past results. Six of seven have been positive, and, as I mentioned, only one has exceeded 4.5% which makes it difficult to expect a large move. Furthermore, sentiment is extremely negative, yet TGT bulls have done a good job fending off big moves lower.

If I'm looking for a big move, Chinese retailer Vipshop (VIPS) is the name to look at, rather than TGT. The trend on VIPS is higher, in terms of expected move. Options are pricing a move around $1.50, or 12%, and I believe we're likely to see it.

There has been strong action on the call side of this stock, and given the huge beatdown it has suffered, I may consider joining that side of the fight. Four of the past five reports have seen double-digit moves, although two of those have been to the downside. So although recent history may be on the side of a big move, directional history is not. Still, there is enough action with the calls, here, that taking a small shot on the $12.50-14 weekly spread appears interesting for aggressive portfolios.

Overall, I'm looking for a smaller-than-expected move on Target, and feel the pessimism there may be overdone. History should cap any move lower, while pessimism will cap a large move higher.

On the flip side, VIPS looks like a casino waiting for someone to roll the dice. Expect action, excitement and lots of movement, here. Anything under 5% would be shocking to me.

At the time of publication, Collins was long HD ratio put spreads, although positions may change at any time.