How Not to Get Spanked

The sad truth is that most traders are going to get spanked this earnings season. If you want to join them, that’s your business.

If you’d rather make money instead, read on.

Trading is all about finding reliable, repeatable historical patterns and counting on them repeating into the future. I’ve made a great living on this fact. Everything I do is based on rules-based systems that historically produce consistent profits.

The most reliable pattern by far is produced by earnings announcements. On many stocks, earnings creates gaps on specific, pre-announced dates. We have a precise triggering event on a pre-defined date. It gets no better than this.

And yet, most people play it completely wrong.

Check out the chart below on Zoom Video Communications (NASD: ZM):

The green “E” triangles are pre-announced earnings dates. Notice that over the past 3 earnings, Zoom gapped up, then down and then dropped big AFTER the announcement.

See, most people are trading earnings the wrong way. They essentially “bet on the black” by trading directionally over the earnings. They buy stock, short stock or buy calls or puts and hold over the announcement hoping that the stock moves their way.

This is a sure-fire way to get spanked.

A smarter way is to trade both directions by buying calls AND puts, creating a straddle. This is a safer way, but not the best way.

OK, you’re now wondering what’s the best way.

And I’m about to tell you…

The One Line That Goes Up No Matter What Earnings Do

I’m going to let you in on a secret that few traders know about. I call it surge.

Check out the surge chart on Zoom below:

The red line is implied volatility (IV). IV is caused by an increase in demand for options as well as an expected move in the stock.

Notice how it surges consistently in 1 direction into the earnings announcement. That direction is UP! Each time. Every time.

That’s obviously not the case with the stock, which moves in both directions.

Options, both calls and puts, get more expensive as the earnings date approaches.

This is the most consistent pattern in trading.

The trick is finding them.

I have a team of rocket scientists — yes, literal rocket scientists — that have built technology to scan vast amounts of options data for every stock in the market. In short, my scans uncover every tradeable surge pattern available.

The strategy is simple.

  1. Buy short-term calls 7 days before the earnings announcement if bullish and puts if bearish.
  2. Sell the option BEFORE the earnings announcement.

Selling before the announcement is critical. If you hold the option over the announcement, you will get crushed as the IV surge collapses (see chart above) and less predictable stock reaction after the announcement.

For instance, here’s how a previous Zoom trade performed:

Nov 23, 2020: Bought ZM Dec 4, 2020 $435 Call $32.85

Nov 30, 2020: Sold ZM Dec 4, 2020 $435 Call $56.00

Net Profit: $23.15 (70%)

Check out the stock and surge chart for the 7-days of the trade below:

The stock and the IV surged huge into the announcement generating a high-probability 7-day 70% ROI.

This is just one example, of course. As you can imagine, I have lots more.

A Look Behind The Scenes at 5 Top Earnings Plays from My Scans

Let me show you a few of the top stocks my scanner is looking at right now as we head into earnings.

We’ll start with the ones that have the biggest surges.

The “Best Close Median” column is the historical surge 7 days before earnings. Notice that ZM has a 14.30% surge into earnings. You can actually see it in our previous chart.

Now, the icing on the cake to this system is to find high-surge stocks that ALSO move consistently up or down into the earnings announcement.

Yes, I have scans for that.

Here is a snapshot of the biggest surge stocks that also move consistently up or down 7 days into earnings:

Notice that Zoom is on the list. In addition to a 14.3% IV surge into earnings, it also has an average 22.88% bullish move into earnings.

Talk about a 1-2 punch to profits!

My all-new algorithm finds these opportunities over…and over…and over.

We’re on track for about 100 of them this year alone.

It’s already identified the following “IV Surge” trades during a brief testing period:

  • Mitek – 650% gain in just eight days
  • Dril-Quip – 331% gain in nine days
  • PennyMac Financial – 300% in just three days

But some of the biggest wins include 1,000% in 3 days, 2,500% in 16 days, and even 3,800% in 6 days.

That’s the aim of Operation Surge Strike – to target huge speculative “IV surges”…to make as much money as we can, as fast as we can.

Get the full story right here.

Talk soon,

Tom Gentile

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