Earnings Season Makes Everything More Exciting

That statement is a cross of truth and sarcasm. We do know we'll get volatility in individual names. One of the questions I get asked most is how do I think a stock is going to react post-earnings. Are you long into earnings? How are you playing earnings? Those type of questions I see. Anticipation is difficult, so I tend to turn to history and identify patterns and trends. Nothing is guaranteed, of course, but some of the best traders I know will play a trend until it ends. Eventually, you'll be wrong when it ends, but a trend/pattern can help measure your probability. For instance, Amazon is on everyone's radar today. The option's market has priced a move around 6.5% by tomorrow's close. On the surface, especially given the recent market action, this may look cheap. The thing is Amazon has closed with a 5% or less move eight of the last nine reports. Many folks also question the company's valuation. This report will be the one to do Amazon in, but in the last six reports, the stock has closed higher the next day five times. Or how about Alphabet ? The market is only pricing in a 5.2% move. But what if you knew that you had to go back THIRTEEN reports to find a one-day change greater than 5.6% on Alphabet. Expectations of volatility become much less at that point. If you want volatility, then you need to consider SNAP or First Solar or Expedia . Those names have attractive patterns. One reason I don't mention shorting volatility is because of how badly you can get run over. Shorting a straddle or strangle on Alphabet or Amazon may win a lot, but that one loss could equate to complete portfolio decimation. SNAP is pricing in a huge 18% move, so this one is a challenge to play. The stock has moved at least 14% five of the past six reports, but the best pattern has been the fade. Shares have reversed direction four of the past six times over the following three weeks post-earnings. Expedia is pricing in an 8% move overnight. This one has been a big mover the past four reports in a row, so there's some logic to a straddle or tight strangle play. Also, Expedia shares have been lower 13 days from the post-earnings close the last five reports and nine of the last ten, so a small put play late tomorrow afternoon or selling a bearish call spread appears to be a favorable trade. First Solar may be the best of the bunch. This stock is pricing an 8% move. Over the past thirteen reports, we've seen the stock move AT LEAST 8.5% during the trading day every single time. That means there has been the opportunity to profit on straddles or tight strangles for three straight years. That's appealing for those at their desk throughout the trading day. Also, this stock has experienced an average move of nearly 8% the following 13 days post-earnings close (Friday's close). If the two week straddle (November 2nd or November 9th expirations) are priced anywhere under 6%, they would be attractive. If they are priced with expectations of a 5% or less move, then I'd likely be aggressive with that trade. Obviously, if First Solar is bought out or if there was some other news that was going to limit price movement, then the observation is invalid. Overall, I believe First Solar and Expedia offer both the best risk-reward (via long volatility) into earnings and the most playable post-earnings patterns.

Earnings Season Makes Everything More Exciting

That statement is a cross of truth and sarcasm.

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