Beer 'n' Earnings

beerntrading

beerntrading

Earnings make up a small percentage of risk I take on in my trading account, but account for a large chunk of my profits. They are by far the most exciting trades I do, so here's a place for me to post about them.

My method, generally:
1. Look for stocks where the market is optimistic, neutral, or pessimistic and look for overly optimistic or pessimistic opportunities (I only consider them to be overly optimistic / pessimistic about 10% of the time).
2. For a detailed opinion on the likely outcome of earnings relative to consensus based on broad market conditions.
3. Determine a target price based on #2 above, and other likely outcomes if I'm wrong on #2 (I frequently am).
4. Select an option position that best meets my goal from #3 while also mitigating potential risks.

So far this year, I've made 10 plays on earnings releases and been profitable on 8 of them. Typically I fire off my closing order during the opening minutes of the trading day following the release. On 4 of my winners, they would have been losers if held till the end of that day. Occasionally I'll turn around and trade the bounce or retreat from the overreaction.

Earnings plays this year and the win or lose:
BIDU (L), MU (W), DAL (W), FDX (W), EBAY (L), BA (W), NFLX (W), MS (W), ORCL (W), TGT (W)

My rules for trading are:
-Only trade on underlying securities within my 'stable' (50-ish stocks, all in the S&P with solid volume and good liquidity).
-Risk is not to exceed 5-10% of my overall trading account, and less than my overall realized gains in the preceding week.
-Place a tight trailing stop on any position left open after 9:45 am following the release.
-Never trade on an underlying which I have holdings of in my investing account.

Questions, comments, and (especially) constructive criticism are very welcome!

I'll give a more detailed look at my trades as I place them going forward. Next up MSFT in just a moment...
 
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MSFT

The market is overly optimistic on this with prices just coming back into expanding Bollinger bands after a bounce on 4/24 apparently following Monday's market-wide bounce. During the last year, price spikes that preceded earnings came back into line with the prior trend after earnings releases (both beats and misses) didn't meet expectations.

Based on that, anything short of a solid earnings beat (say.... 0.75+ per share) will likely result in a return (by closing tomorrow) to the $66 support seen prior to Monday's bounce. Ideally, we'll see a push down as far as $65 in a market open overreaction. In the event of the market moving against this, $70 could be in play.

Because I'm not particularly confident in my assessment, I'm unwilling to give up ITM intrinsic value, so we're looking only at OTM positions. May 5 puts with strikes 67.50 (at 1.25) and 67.00 (at 1.05) look attractive and give a break even at our target. I prefer May 5, because if the market moves against me, this gives me 5 extra trading days to recoup what would otherwise be a total loss, and the 0.11 paid is very reasonable for this protection.

Trigger pulled at 1.05 on $67 May 5 put which should put break even at ~66.18 and give a 100% return if the market overreacts down to $65. Contingent order is set for this eventuality.
 
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GOOG

The market is definitely over optimistic on this one with a chart pattern very similar to (actually, I could copy and paste from) MSFT. Historically, it's a bit more difficult to determine what the price is likely to do. We've seen very optimistic expectations exceeded in the past, and underwhelming announcements bounce the market. Based on that, I don't have a clear expectation of price movement in the morning hours. And also, that's combined with my demonstrably irrational fear of GOOG's price.

I'll take a pass on this trade.
 
BIDU

Again, we have an overly optimistic market, and again, we could copy and paste the chart assessment from MSFT. Even solid earnings beats in the past have been insufficient to meet these expectations. Big (and sustained) moves after earnings are the norm, and that's reflected in IV% north of 100 on May 5. There's definitely solid potential here for a move below $180, but the 100% target is unlikely unless there's a big enough move.

Ultimately, I'll take another pass on this one. I think it's a bear, I think there's good return options on the table, but I like MSFT risk-reward better. I'd make this play except it would give me two relatively similar bear positions and a failure in my logic would slap me down thoroughly and erase a good chunk of what has otherwise been a very good week.
 
GM

Last one for today. GM is facing poor market conditions for car sales. F gave us a preview (with a beat) of this, and after a brief spike in the opening minutes, it's down solidly today. But expectations were high with F. For the most part, it appears the market has digested the poor auto industry conditions. Expectations are only slightly optimistic and price movement expectations are very subject to a move on either side of the consensus--which is to say, I don't see a clear direction that covers most of the consensus range. I'd throw $34 out there as my expectation, but not with any confidence.

Another pass on this one since I have no clear direction.
 
FCXoptions said:
Looks like MSFT is dropping for you
More...
We'll see if it holds tomorrow. I don't put any faith in extended hours movements.

MSFT released 0.73 adj earnings. This is about as close to my 0.75 "solid earnings beat" as I've seen in trading this year. This should be exciting tomorrow. I'll be happy to get out of this one for break-even.

If I had to guess, I'd say we'll have a slight spike maybe as high as $69 in opening minutes followed by a steady decline towards $66.
 
Time to assess the damage

GOOG - earnings release was slightly high of in-line. So, let's look back:
beerntrading said:
...and underwhelming announcements bounce the market...I'll take a pass on this trade.
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Score one for risk management. It's open season for Google bears, and I'd have been slaughtered at the opening bell with my long put.

GM - Very good numbers mirroring Ford as expected. The early chart also looks to be mirroring F. Think we see $34 by days end???

BIDU - This one deserves a bit closer look since it was the one I passed up in favor of MSFT. The two trades I looked at, May 5 182.5 and 185 puts were 3.60 and 4.70 respectively yesterday. Today they're both winners at 5.75 and 7.75. Though, in reality, I'd have fired off the closing order in the opening minutes for a break even or slight gain or loss. The beat was expected, the substantial drop was expected--this one only looks good in hindsight. A well reasoned trade-off that didn't pan out how I'd hoped.

MSFT - What can I say?..that I haven't already.
beerntrading said:
anything short of a solid earnings beat (say.... 0.75+ per share) will likely result in a return (by closing tomorrow) to the $66 support seen prior to Monday's bounce.
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beerntrading said:
MSFT released 0.73 adj earnings. This is about as close to my 0.75 "solid earnings beat" as I've seen in trading this year. This should be exciting tomorrow. I'll be happy to get out of this one for break-even.

If I had to guess, I'd say we'll have a slight spike maybe as high as $69 in opening minutes followed by a steady decline towards $66.
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It's a loser now, and it's looking like a loser on expiration. The 0.11 to buy 5 extra days is still looking good. The logic was sound, the risk was tolerable, the position met the risk / reward goals. The only thing I've learned is a lesson I've learned before (and I suspect I'll learn again--but here's hoping it sticks this time) wait until nearer closing to place the order.
beerntrading said:
Definitely wishing I'd waited until the closing moments of the day. The MSFT 5/5 $68 strike looks really attractive at 1.25
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Both that and my $67 strike are losers at the moment. Both may come around before expiry--here's hoping!
 
New week, new earnings. On the block for this week in my stable should be very exciting with PFE, AAPL, MO, FB, AIG, TAP, and ED. But I have holdings in MO and FB which take them off the table (which, needless to say, means I'm bullish on both).

I don't like PFE enough to make a direction call on this one either way--and while I might pick up a tiny position on a May 5 $34 call, I don't really see this one as a good chance for a big move. I also don't see enough opportunity for a play on a credit spread.

AAPL might get a rare naked put out of me as this is on the short list of new positions for my investment account--I'll be watching price movement tomorrow.

I'll almost certainly make a play on AIG. After last earning's surprise (due to commercial reinsurance reserve increases), the market is still very pessimistic. The price is suggestive of additional reserve development that simply isn't going to materialize--the reserve is necessarily forward looking, and its unlikely AIG overlooked additional reserves that will have materialized. So, really anything within the consensus range should send this one up...the question is just how much.

Historically earnings have pushed this stock down. I think this will be different as the market stabilizes after a surprise loss. Even a modest forward P/E of 13.3 points to $64. Higher prices certainly in play too. With two more trading days to go, I'll watch for a good entry with this target in mind.

TAP rarely disappoints. I'll be watching through tomorrow for a nice entry.

And finally, ED. No opinion on this one--I'll take a pass thanks to its low volatility.
 
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