Quote from scottandmo:
I think we've discussed this before, but I'd like to examine some specific examples to understand your analysis every once in a while since it seems to be accurate more often than not.
When you say you'll get a better read on DRI, what is it that you think will be beneficial next time around? What particular information were you keying in on when you took the NKE and ACN positions and how much time do you spend researching each position?
The way DRI shares traded post earnings gave me clues as to how the shares will react the next time around. Before the earning report, my research showed DRI shares selling off by 2-4% on its last 3 quarterly reports. The shares were right at the 52-week highs near $55 where I expected resistance even on a good report.
The result: the earning report was just slightly better than estimates, but shares pushed higher by 5.8% the following day breaking into new 52-week highs even as the overall market stalled.
What I learned: shares of DRI rallied on an average earning report where EPS and sales were inline or just better than estimates. In the same light DRI shares dropped 3 times before on that same type of earning result. That tells me there's a change in DRI price action that I now expect to see going forward. I also wanted to see how the 6% short float on DRI shares were going to affect the shares. Normally, you would need a share float in the +10% to see a sizable short rally, but I bet we saw that last week.
How am I adjusting going forward: Chart pattern is the most important factor. If the chart pattern is weak, then I'll stay away from DRI, but if the chart pattern is strong showing a potential breakout or sitting at the 50-day moving average, then I'll play the odds that DRI shares should gap up even if earnings are average. Instead of hoping that DRI's earning are overwhelmingly strong, all I need is for earnings to be average and I should get an easy profit.
As for today, we'll see if that holds true in NKE shares. Last time I noticed NKE shares gapping lower on weak earnings that changed its earning landscape from always a move higher to a gap lower now. On the chart today, it was easy to see NKE shares hit its 200-day ma and $100 round number before retreating days ago. Support would be around $90 or even lower and earnings were weak. And I now expected NKE shares to drop lower even if earnings were average.
The result: NKE reported earnings of $1.23 on revs $6.67B with both numbers beating estimates (I pulled from Yahoo finance) of $1.12 on revs $6.41B. You would think that NKE shares would just push higher on such a good report right? Not this time around, because everyone who thought it would push higher is already in the shares at $95-$98. With no left to buy and earnings just average, everyone looked for a reason to sell. Right now, I don't even know what the reason to sell is but I felt the pressure to the sell side, and jumped in with the puts knowing its history and the odds on my side.
So far NKE shares are at $93, but we'll see tomorrow morning where I can get out on my positions before.
As for ACN, I saw a nice 6 month cup base with a 2-3 week handle. There was a now a good chance that ACN shares could clear its 52-week high knowing that DRI did just that last week. I also know that ACN's sector is much strong with CTSH and IBM trading strong after earnings. Still, I haven't seen ACN in a while, hence, another $300 risk to test the trade. If $68 holds, I'm looking at a $600 gain making back my loss on the DRI position.
Sorry, if the comments are short, maybe I'll email a longer version, but most of all this comes from experience. I've only traded options on earnings for almost a year, but I've traded earning trades for about 3 years now, so there are some stocks that I know their reactions by heart.
