This Disease Could Be Contagious for Stocks (It’s Not ‘Rona)

Good morning, Power Profit Traders!

As a reminder, I am LIVE at 9:30 a.m. ET every morning RIGHT HERE — and sometimes you can catch me even earlier at 8:30 a.m. ET on the Money Morning LIVE show.

Yesterday, in fact, I popped on the pre-market show to talk about oil prices, among other things, which is why I wore (and got lovingly roasted for) my hat.

Joking with Olivia Voz, host of the Money Morning LIVE show

And today I dropped in to talk about one of my favorite topics ever: Cryptocurrencies.

I discussed how to mimic Bitcoin (BTC) by investing in certain stocks, and the potential Bitcoin ETFs that are stepping up for approval heading into 2021.

I’ll surely be talking more about that — and my favorite crypto plays — here again soon, but for now, I feel it’s important to stay focused on the task at hand: Trading earnings season!

Specifically, I wanna discuss the DISEASE that can ravage certain sectors during earnings season, and the industry that option bears are watching closely right now.

Airline Guidance is Ailing

It’s pretty common that in families with more than one child, if one kid catches a cold, the other kids are likely to get it.

There is a similar contagion in the markets when it comes to sectors.

If one company reports stronger-than-expected earnings and guides higher for the current or future quarters, other firms in the same industry are likely to do the same.

This also works the other way — if the earnings or guidance of a company disappoints, or if revenue projections are revised lower, it’s likely other firms in that same family will suffer the same fate.

Case in point: Airlines.

Delta Air Lines (DAL) reported earnings on Oct. 13.

While the company beat analysts’ per-share earnings estimates, it guided lower for the fourth quarter… which was contagious.

The same thing happened for United Airlines (UAL) yesterday; the firm beat per-share estimates but guided lower for the current quarter.

So it certainly caught my attention when American Airlines (AAL) ended up on our Unusually High Put Option Volume list from the TG Suite’s Money Report tool.

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American Airlines is expected to report earnings before the opening bell tomorrow, Oct. 21.

Ahead of that, option traders were scooping up long-term bearish bets on AAL.

The stock’s $15-strike put expiring in January 2023 — more than a year away — was No. 3 on our Watchlist, in fact.

“Vanilla” buyers of these LEAPS puts are expecting AAL shares to crumble and breach $15 before the options expire.

As of Tuesday’s close, the stock had a ways to go before getting that low, ending just above $19.50.

Would I follow the money, in this instance? (Meaning would I want to mimic these bearish bets and place similar AAL positions on my own?)

No, and here’s why…

I’m not usually a fan of buying an option and holding through an earnings announcement.

Implied volatility (IV) naturally rises ahead of earnings (or any known catalyst), and right before earnings you’re almost guaranteed to pay the highest price possible for the options — because a post-earnings IV crush is all but guaranteed.

In simpler terms, I don’t like to overpay for anything, including my options. I’d rather just wait until after the earnings are reported, when I can buy contracts on sale.

Of course, there are other ways to capitalize on rising IV into earnings — including the long straddle strategy I laid out in my LIVE trading hour recently — but you have to be in the room to catch those gems!

So hop in here at 9:30 a.m. ET and let’s see what’s shakin’ at the opening bell together, shall we?

See you there,

Tom Gentile

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