Dear Reader,
There’s only ONE story that you need to focus on this week.
It’s not the war between Israel and Hamas…
It’s not Bitcoin’s latest move – which is in itself a major story…
This week, it’s all about the upcoming earnings announcements from the biggest names in the industry.
I’m talking about Amazon…Meta… and Microsoft, to name a few.
Now I know this a bold statement to make, given everything going on in the world right now…
But I’m about to show you why this this quarter is so important – and how to trade it like a pro.
Let’s get started…
(Click on the image above to watch this video)
If you’ve ever traded a stock into its earnings report, then you know the anxiety that comes with it, especially after the announcement comes out. And THEN you have to deal with the waiting that comes until the markets open the next day. I went through the same thing as a novice options trader – and I suffered the consequences for not knowing one simple formula. Now we’ll get to that in a moment. But first, let’s take a short trip back to the 80s and early 90s…
I started out in Home Depot’s plumbing department before moving up into management and then eventually landing in the IT. Back then, they used to grant employees stock and stock options. It wasn’t long before I figured out that I could buy stock and trade options publicly. And it was then that I spotted the first of what would be many pattern trades over my career.
One of those patterns was that Home Depot’s stock would jump after every earnings report. So, as a beginning trader, I hatched a simple plan: buy as many out-of-the-money options (OTM) as possible and sit through an earnings report. And for a short time, anyway, it worked. But it wasn’t long after that I realized I was losing – and losing BIG…. even when the stock did go up after earnings. I even remember thinking at the time, “only I can figure out how to lose money buying calls – even when the stock movies in my direction.”
Sound familiar?
The problem I had back then – like every other retail trader – was that I didn’t know a simple options formula that can help predict any stock’s price movement through an earnings report. You read that right… Options CAN help you predict future stock price movement, especially through an earnings report.
Here’s the formula:
ATM Call +
ATM Put =
Straddle Price
(Our predictor)
You take the expiration date that’s JUST PAST the earnings date (not before – and not too far after). Then, you take the price of the at-the-money (ATM) calls and puts – and you add them together. That’s it! Easy, right? The resulting price will give you the expectation of the jump in stock price after earnings.
Now let’s put this formula to work using Tesla, Inc. (TSLA) as our example…
Last week, TSLA was due to report earnings. The stock had dropped back significantly, with many traders thinking there was going to be a bounce, regardless of what they reported. In fact, some retail bulls were expecting TSLA to jump back to its July highs while the bears thought it would drop back to $200 per share.
So what ultimately happened?
Using at-the-near money options with just a few days to expiration and adding the ATM calls and ATM puts, it would cost you about $16.50 to buy this straddle:
ATM Call (8.50) +
ATM Put (8.00) =
Straddle Price = 16.50
Add and Subtract from Price
That’s your range right there – around $16.50 over or under the current price after earnings are announced. And the results? Tesla missed expectations, and the stock dropped about 20 points on the day. Not perfect, but the undeniable truth is that the options were a much better predictor than the retail traders. In fact, the stock opened lower the next morning… down about $16.50… exactly what the options straddle said.
Now let’s take a look at the FAANG stocks reporting this week using our formula (Meta, Amazon, Apple, Netflix, and Alphabet):
- MSFT is seeing a $15-point range after its earnings report.
- GOOGL has an expected range of $7 after earnings.
- META has a range of near $27 points after its earnings.
- AMZN has a range of $8.75 after its earnings report.
Again, you simply add and subtract the number above from the closing stock price before earnings to get its expected range the day after the report.
Very simple indeed!
To summarize, this is – by far – the easiest way to predict a stock’s range through earnings. Now it won’t predict whether a stock is going to go up or down. It’s not a crystal ball… it’s not perfect… and like anything in the markets, there’s no guarantee. But it will tell you the range of a stock’s movement to help you plan your trade. The other thing I’ll add is this: there are option strategies that can help you profit regardless of the stock moving up or down. And we’ll talk about those in the near future.
In the meantime, practice this formula and let me know how it’s helped your own trading game.
To your continued success…
Tom Gentile
America’s #1 Pattern Trader
