Only about 8.5% of the S&P 500 companies have reported third-quarter earnings so far. Of them, 74% beat their estimates, both on their top and bottom lines.
But in my 30 years of trading, I’ve seen plenty of instances like this where even after a good earnings report, the stock gets hammered by 10%, 15% – even 20% – in a single day.
And it happens because of bad guidance given by the Wall Street analysts.
Now they’ll try to tell you which way a stock will move before the announcement comes out…
But the truth is, they don’t know any more than your local mail carrier does.
The good news is… you don’t actually need to know.
You can cash in on any company’s earnings report – good or bad – using two simple strategies.
And both of them offer unlimited cash potential…
Unleash the Power of the Straddle and the Strangle – and Never Miss Out on Profits
Third-quarter (Q3) earnings season unofficially kicked off last Wednesday, with Alcoa Corporation (AA) reporting an earnings miss of $0.72 on a $3 billion revenue. Expectations were for $0.75 per share on a revenue of $3 billion, and revenue fell 43% from Q3 last year – despite it meeting expectations this year. That caused a a slight drop in the stock (from $37 per share to $36 per share), but it climbed back up to $38 per share (as of the time of writing).
Now you might think that an earnings miss would’ve affected this stock much more, but there were no real dramatice price move. Some stocks experience huge moves – for better or for worse – depending on the earnings report, analysts “guidance” about what to expect ahead of earnings, or a combination of both.
Take disk-drive maker, Seagate Technology plc (STX),for example…
STX crushed eps projections by $0.10, and the stock skyrocketed 12% or more on the pre-market open and pretty much stayed there for the rest of the day.
If you were bullish and held STX over earnings, then you had a good day. If you were short, or were only holding long puts through earnings, you might be left wondering what you were thinking.
Now when companies release earnings information, it can trigger huge price explosions… up to 2,150% bigger than normal market moves. And my colleague Chris is one of the few experts who can show you how to predict and profit from these price explosions. Click here to learn more.
But there’s plenty of cases where stocks don’t fare well due to earnings, like Whirlpool Corporation (WHR), which reported an eps of $3.83 on a revenue of $5.4 billion. Consensus estimates were for an eps of $3.90 on a $5.5 billion revenue.
Here’s what happened to the stock shortly after…
Just off of a bad earnings announcement, the stock fell nearly 7% from its closing price of $182.50 to $170.50. So if you were bullish on WHR through earnings, you may be saying “ouch” right now (or another four-letter word). And if you were holding long puts, you probably captured some nice profits.
The bottom line here is… trading options through an earning report is a crapshoot. A company could get great press before an announcement but report worse than expected earnings, causing the stock to tank. Or, a company could get horrible press going into earnings but meet or beat expectations, causing the stock stock to skyrocket.
In both instances, poor guidance or off-the-mark predictions put you in position to take a huge loss – or miss out on huge profits.
So these are the best two strategies to ensure that never happens to you during earnings season
- The Straddle
What it is: An options trading strategy where you buy an at-the-money (ATM) call and an ATM put with the same strike prices and expiration dates – at the same time, on the same order ticketWhen to use: In high volatility and during earnings season
How to profit: When the stock (or other underlying security) moves either up or down
Maximum risk: The net debit paid (cost of both the call and put)
Maximum reward: Unlimited
Pre-earnings straddles: Exit before earnings come out
Post-earnings straddles: Exit within a few days after earnings come out
- Strangle
What it is: This is basically a cheaper alternative to the straddle, where you buy an out-of-the-money (OTM) put at a lower strike price and an OTM call at a higher strike price with the same expiration dates – at the same time, on the same order ticket.When to use: In high volatility
How to profit: When the stock (or other underlying security) moves either up or down
Maximum risk: The net debit paid (cost of both the call and put)
Maximum reward: Unlimited
In terms of trades through earnings, I’d consider options with expirations that are at least 30 to 60 days out. When it comes to exiting, I typically recommend in my premium service that members get out of their trades right before earnings announcements. That way, you’re in position to merely shave a few bucks off your profits than facing a larger than expected – and wanted – loss.
Good trading,
Tom Gentile
