Earnings journal

[TheBigShort]

I'm studying your posts so don't mind me bringing up old ones. This post peaked my interest.

You said "the kurtosis of the returns was 6". Although my understanding of kurtosis is pretty much null I wanted to ask how do you measure it?

What does "6" kurtosis mean?

How do you incorporate this measure into your earnings plays?

Cheers!

kurtosis is the 4th moment. It helps explain how the outliers (tails) look. Kurtosis of 3 is normal. Kurtosis of 6 means the tails are fat. This means outlier events happen more often than a normal distribution.

So if the returns of TIF have a kurtosis of 6 - meaning large moves happen more often than normal. You could see what the implied distribution is, if the implied distrobution is normal, you could sell the body and buy the wings for a long run +EV.

 

[Philo Judeaus]

kurtosis is the 4th moment. It helps explain how the outliers (tails) look. Kurtosis of 3 is normal. Kurtosis of 6 means the tails are fat. This means outlier events happen more often than a normal distribution.

So if the returns of TIF have a kurtosis of 6 - meaning large moves happen more often than normal. You could see what the implied distribution is, if the implied distrobution is normal, you could sell the body and buy the wings for a long run +EV.

Very interesting. What kind of software do you use to measure kurtosis?

Do you look at kurtosis for every potential earnings play?

Also are you measuring the kurtosis of only the past earnings price action or just the price distribution of the stock in general (TIF)?

So if TIF is in the 6 then with all else equal one would look at buying the ATM straddle for earnings?

 

[Magic]

Just to clarify, you sold the 157.5 straddle? Also in which exp? June weeklies? Thanks.

Yeah, unless there's something unusual about pricing I will sell the shortest expiration containing the earnings event.

Edit - Barely missed net zero; MU opened straight up and FDX straight down. Ended up something like -2% on total debit/risk.

 

[TheBigShort]

Long the 121C FLY on WBA 52/55/58.
This is a delta bet. Avg px 0.89

 

[TheBigShort]

Yeah, unless there's something unusual about pricing I will sell the shortest expiration containing the earnings event.

Edit - Barely missed net zero; MU opened straight up and FDX straight down. Ended up something like -2% on total debit/risk.

FDX looked like a fantastic trade at 9:50. What went wrong there you think?

A word on CAG. Although iv is high, their last earnings move was quite large. I have not checked yet, but it's important to find out what happened there. Did CAG do an acquisition of a very volatilite stock? Etc... The last earnings move could mean a change in the fundementals of the business meaning the implied move could be cheap! I have not checked but just some food for thought going forward.

 

[Magic]

FDX looked like a fantastic trade at 9:50. What went wrong there you think?

A word on CAG. Although iv is high, their last earnings move was quite large. I have not checked yet, but it's important to find out what happened there. Did CAG do an acquisition of a very volatilite stock? Etc... The last earnings move could mean a change in the fundementals of the business meaning the implied move could be cheap! I have not checked but just some food for thought going forward.

My concern for FDX was the recent Hussein drama and selloff would affect the earnings move. Usually I haven’t seen such oscillation; gap up, opens and goes down, then trends up all day. FDX still decent enough to cover almost all my MU losses so can’t complain. If I waited a bit longer it would’ve came back up to my strike, but I still don’t have anything stronger than a guess how price will path in the open so just try to close after the initial frenzy.

Re: CAG, I’m not at my work PC but weren’t the two last moves mostly intraday with smaller jumps? I looked at price 1h post-open in Dec and Mar and both moves were pretty mild iirc. But then the stock trended heavily all day. Was almost concerned with this behavior that the implied move won’t bleed out as quickly if some of it is priced in for the tendency to have big earnings intraday moves.

Wasn’t able to find much besides an investor presentation that was a little generic yet relatively upbeat. My news sleuthing could use work though as you say.

Also I’m still not sure how to weight recent moves vs. average. If everything is unchanged I almost might prefer a recent move > implied, if that is stronger in mkt memory the next implied move might overcompensate. We’ll have to stay tuned to our CASY / PLAY beats next quarter.

 

[TheBigShort]

Re: CAG, I’m not at my work PC but weren’t the two last moves mostly intraday with smaller jumps? I looked at price 1h post-open in Dec and Mar and both moves were pretty mild iirc. But then the stock trended heavily all day. Was almost concerned with this behavior that the implied move won’t bleed out as quickly if some of it is priced in for the tendency to have big earnings intraday moves.

It Jumped about 7% last quarter. The implied move was extremely pricey today but I did not have enough time to give it a second look. I thought I'd give you a heads up as I have been burned a few times solely looking at implied/realized move.

Also I’m still not sure how to weight recent moves vs. average. If everything is unchanged I almost might prefer a recent move > implied, if that is stronger in mkt memory the next implied move might overcompensate. We’ll have to stay tuned to our CASY / PLAY beats next quarter.

You will see this quite often during earnings season. I will give an analogy using horse racing.
A particular horse runs a lap on average in 50 seconds. Over the last 12 races, it's fastest lap was 40 seconds and it's slowest lap is 60 seconds.

In a recent race the horse broke it's leg and finished the lap in 75 seconds! Next month the horse is racing again. A bunch of analysts have come out and said the horse is back to normal! The implied race time is a few seconds higher than the average race time. It is 58 seconds.

At first glance you might want to bet on the horse finishing in 50 seconds (58 seconds being too high). However after doing some research you find out that it takes 3 months for a horse to fully recover from a broken leg. You also find out that a similar horse broke it's leg and is still recovering.

Some other information you might want to look at is, did the horse break it's leg before? How long did it take to recover? etc..

Here are the implied moves for a random company STZ. Over 4 years and 16 quarters, do you think the volatility of the business has remained the same? Yet the market rarely deviates from the "average" move.

If I had to cherry pick an example it would be STMP. They lost their largest client (90% of business) in previous quarter and the market implied move for the most recent quarter was only a few points above long run average!!

 

[Magic]

Thanks, this is very helpful info. Will definitely incorporate this more heavily into trade planning. Makes sense that getting a picture of the fundamental reality will provide most of the edge since MM algos can parse stats almost as good as we can.

Any places you’ve found that consistently give good news? Currently I go through the IB feed, search Google and will do a pass on company website atm if I’m doing the full research for a trade.

 

[TheBigShort]

Thanks, this is very helpful info. Will definitely incorporate this more heavily into trade planning. Makes sense that getting a picture of the fundamental reality will provide most of the edge since MM algos can parse stats almost as good as we can.

Any places you’ve found that consistently give good news? Currently I go through the IB feed, search Google and will do a pass on company website atm if I’m doing the full research for a trade.

The statistics are simply a filter.
When I talked to euan Sinclair (whose has been consistent with earnings trades in size) mentioned that a fundemental view can be an edge that lasts for years as most funds systematically sell vol to extract the idiosyncratic risk premium.

I subscribe to a bunch of news feed through IB. The company website is also great for information. But the best place is the 10Q-10K/earnings transcripts on seeking alpha.

 

[Philo Judeaus]

I thought I'd give you a heads up as I have been burned a few times solely looking at implied/realized move.

What do you mean by this?

How do you measure the implied vol against realized?

In my brain implied means looking at the "implied volatility" under todays option statistics on thinkorswim. But Im' not sure how to look at/measure realized vol? Is realized vol historical vol? I dont think it is.

Sorry for the noob questions, I'm fairly new to this.