It can be hard to put aside the noise. There is often so much going on in the markets from day to day it is easy to get distracted, whether it be from the focus of a trade, the pursuit of an idea or even the enjoyment of the day. If you find a pattern or trend that has worked it the past, you have to try not to let it get away from you in all that noise.
Take Cognex (CGNX) as an example of a trend that can easily become lost. It is not a big, household name and the best trend here will take some patience and following, something many are not very good at any longer. Traders want instant gratification. Traders want a trade every day, sometimes a dozen or more in a day. And traders want instant results. CGNX may offer that, but that may not be the best trade.
When I look at past results, I do see the possibility of an instant trade on this one. CGNX has finished higher than its open the last four earnings reports. I could certainly see buying the open and selling that stock at the close, although it may not be easy. Twice -- the last two reports actually -- a trader buying the open would have experienced an intraday drawdown of 4% to 6%, which would be tough for many to hold. On the flip side, there have been two occasions where buying the opening offered the opportunity to sell the stock for double-digit gains the same day. In all four cases, buying the open resulted in a profit by the time the stock closed.
The option market is thin, so straddles and strangles are really difficult here. Toss in the fact that we have $5 wide strikes and most folks are going to ignore this one. I do see one possible trade, though. Note the openings have been relatively tame except for February 2014. While we've seen openings three times below the straddle pricing, we've also see the stock move beyond straddle pricing three times during the day, so there is an opportunity. The idea here would be to use a calendar trade where you would immediately close the short end of the trade early on, then look to close the long side of the trade if the stock made a double-digit move.
Given the three big double-digit moves we've seen, I would tackle this one by shorting the September $35 puts/$40 call strangle, then buying 2x August $35 put/$40 call strangle for a cost of $0.25 to $0.40, with my target being closer to $0.30. If there is a big move or even a 10% move on the open, there is a solid chance the extra-long strangles, even if front month, will play out well. The April 2014 results are about the worst-case scenario, as a point of reference.
There is another possible trade for those more patient, based on the following charts, which are also the same reason I would not look to hold those August strangles for very long (as in not longer than the end of this week). The following two charts show CGNX stock action just into earnings and through the next month and a half. I've outlined the price action on the first trading days after earnings with the black box. Other than February 2014, an interesting trend has emerged. The stock has not traded outside of the earnings day trading range on a significant basis for four to six weeks. Even the February report saw the stock come to the top end of the range after only a few days, so what do we conclude here?
Near the end of this week, as I would give the stock two days post earnings, use the trade range of the first post-earnings day of trading as a trigger. If the stock breaks above, then look to buy it using the 21-day simple moving average as a stop point if on the long side. If the stock extends 8-10% into the green, then begin to use the 8-day simple moving average as a stop for half the position and maintain the 21-day SMA for the remainder of the position. While there may be other applications, this one is nice and simple. We tend to get away from nice and simple these days. I really like this idea and I don't plan on letting it get lost in the noise.