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Ride-the-Wave Strategy – Best for Stock Traders

Ride-the-Wave targets multi-day price momentum following a company’s earnings announcement (EA). With this strategy:

  1. Buy a stock one day post-EA if a stock reacts positively post-earnings:
    1. Near the close of trading the EA-day for a pre-market-EA
    2. Near the close of the following day for a post-market-EA
  2. Sell-to-close after 7-10 days, or possibly earlier if a desired price target is reached

Similarly,

  1. short a stock one day post-EA if a stock reacts negatively post-earnings:
    1. near the close of trading the EA-day for a premarket-EA
    2. near the close of the following day for a post-market-EA
  2. then buy-to-close after 7-10 days, or possibly earlier if a desired price target is reached

Important: Ride-the-Wave is predicated on significant price momentum triggered by an EA. The 7-10 day scenario is the maximum trade hold-time. If you see post EA-momentum is halted or reversed by a significant opposite move, re-evaluate your presence in the trade.

This popular StockEarnings screen below will give you a list of stocks that historically exhibit significant price momentum following an EA for the next seven days:

  1. Stocks exhibiting positive post-EA price moves are buy-candidates
  2. Stocks exhibiting negative post-EA price moves are sell/short-candidates

The screen includes those stocks whose Earnings just came out in last two days.

Screen criteria:

  1. Earnings Date Start Date : Current Date + -1 Day
  2. Earnings Date End Date : Current Date + -2 Days
  3. Predicted Move (Next Day) Max : 7%
  4. Predicted Move (On 7th Day) Min : 7%

Strategy Guideline:

  1. Buy the stock if stock has reacted positively. Short the stock if stock has reacted negatively (see above).
  2. Close the position in 7-10 days, or possibly earlier based on price move.

Volatility Crush Strategy - Best for Options Traders

The Volatility Crush strategy is used with stocks that typically experience relatively low-to-moderate price moves (≤4%) following their Earnings Announcements (EA). The basic trade idea is to sell put or call options right before the EA, collecting a credit when options premium is very high due to elevated implied volatility (IV). You then close the position right after the EA by buying the option back much cheaper due to the significant drop in IV that occurs after the mystery of the EA disappears. In assessing this trade, you need to do your homework to ensure you collect sufficient premium to make the trade worthwhile.

This trade is practical due to the low-to-moderate price-move after the EA, which generally won’t significantly affect the options price, unlike an “action” stock, which experience great price moves post-EA. With these symbols, if you’re on the right side of the price move, that’s a great thing. But if you’re on the wrong side of the move, not so great. Consequently, by minimizing the effect of the post-EA price move, you have a much better chance to profit from the reduction in IV without it being ruined by a violent price move.

For this trade, open the position either (1) the night before the EA when the company announces earnings or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

For this trade, open the position either (1) the night before the EA when the company announces earnings or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

This popular stockearnings screen will give you a list of stocks which do not react more than 4% fpost-EA. It includes only those stocks whose earnings are releasing next day.

Screen criteria:

  1. Earnings Date Start Date : Current Date + 1
  2. Earnings Date End Date : Current Date + 1
  3. Predicted Move (Next Day) Max : 4%
  4. Options Type: Weekly

Strategy Guideline:

  1. Options Strategy: Sell Call and Put
  2. Options Strike Price: Current Stock Price – (% Predicated Move x 2)
  3. Expiration Date: It should generally be the closest expiry immediately after the EA.
  4. Buy Insurance: Buying back Call and Put at Strike price which 10% lower than Sell Strike Price is optional but recommended.

Watch Video for More Detail

Volatility Rush Strategy - Best for Options Traders

The Volatility Rush takes advantage of increasing options premiums into earnings announcements (EA) caused by an anticipated rise in Implied Volatility (IV). With this strategy, Buy a Call and Put at-the-money (a long straddle) 2-3 weeks before the EA when IV is lower. Sell the position either (1) the night before the EA when the company announces earnings pre-market, or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

This popular screen will give you a list of stocks whose Options premiums tend to rise into Earnings. It includes only those stocks whose Earnings are at least two weeks away from today.

Screen criteria:

  1. Earnings Date Start Date : Current Date + 15 Days
  2. Earnings Date End Date : Current Date + 30 Days
  3. Predicted Move (Next Day) Min : 5%
  4. Options Type: Weekly or Monthly if that lines up with the two to three-week lead-time for entering the trade

Strategy Guideline:

  1. Buy a Straddle at or close to the money two to three weeks pre-EA.
  2. Sell the position either the night before the EA when the company announces earnings pre-market, or during the EA day when it announces post-market.
  3. Expiration date should generally be the closest expiry immediately after the EA.
  4. Straddle price should not be more 60% of predicted move.

Predicted Move (Volatility)

Similar to Implied Volatility in Options. Expected volatility % based on our Proprietary Volatility Predication Model. We are expecting that stock price will likely to reach % in either direction by the end of next trading session after Earnings are released and not necessarily the closing volatility %.

Why is it important?

    This indicator helps

  1. Knowing expected volatility in stocks after Earnings helps to decide trading stocks before Earnings Announcement.
  2. Taking Advantage of volatility collapse following Earnings Results by using Advance Options strategies such as Spread and Straddles.

Since Last Earnings

Change in share price since last Earnings release.

Why is it Important?

When share has gained more than 10% since it's last Earning release, it tends to over react to minor bad news and give up some gains if not all. So, it contains more downside volatility than upside When share has dropped more than 10% since it's last Earning release, it tends to over react to minor good news and recover some drops if not all. So, it contains more upside volatility than downside.

EPS Surprise (%)

Occurs when a company's reported quarterly or annual profits are above or below analysts' expectations. Here is the formula to derive % EPS Surprice:

Actual EPS - Estimated EPS
------------------------------------- x 100
Estimated EPS

Why is it Important?

Earnings surprises can have a huge impact on a company's stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock's price, but also to a gradual increase over time. Hence, it's not surprising that some companies are known for routinely beating earning projections. A negative earnings surprise will usually result in a decline in share price.

Next Day Price Change (%)

Next Regular trading session Closing price following Earnings result.

For After Market Close Earnings, It is a next trading day closing price. For Before Market Open Earnings, It is the same trading day closing price.

Why is it Important?

Next Day price change is a reaction of Earnings result.

Commercial Metals Company (NYSE: CMC) Beats Q2 2022 Earnings Estimates

Posted on Mar 22, 2022 by Neha Gupta

Commercial Metals Company (NYSE: CMC) Beats Q2 2022 Earnings Estimates

Commercial Metals Company (NYSE: CMC) reported its fiscal Q3 2022 earnings on Thursday, March 17, 2022, in which the company earnings topped estimates:

What to look for: during the quarter bottom line grew 132% YoY attributed to end-market solid demand and efficient operational execution. The company anticipates solid demand in all its leading product lines to sustain through spring and summer building season driven by its growing downstream backlog as well as enhanced levels of work in the project pipeline. In addition, equally seasonal factors are expected to boost steel shipment volumes throughout the third quarter.

Earnings: Stockearning’s estimated EPS was pegged at $1.28, but the company produced $1.53 per share earnings. Including one-time items, Commercial Metals Company had earnings of $3.12 per share in Q2 2022 relative to $0.54 a year before. In the second quarter, the company produced an earnings surprise of 19.53%, with actual EPS of 1.53 relative to the estimated EPS of $1.28. Historical EPS performance shows that in the past 12 quarters, the company has topped estimates 25 times (67%), matched twice (5%), and missed ten times (27%).

Revenue: Net sales in Q3 2022 were $2.009 billion compared to $1.462 billion a year ago. Analysts had predicted that the company could report revenue of $1.857 billion. Gross profit during the quarter increased 65% YoY to $394 million. Commercial Metals Company reported a core EBITDA of $323 million, representing YoY growth of 89%. The North American segment reported net sales of $1.614 billion relative to $1.257 billion a year ago, while The European segment saw a 96% YoY increase in sales to $386 million.

Stock Movement: CMC shares have lost 1.4% since the company released its last earnings release. Interestingly, following the earnings release, the company's shares have in the past been UP 24 times out of the past 45 quarters. So, the historical price reaction suggests a 55% probability of the share price going UP following the earnings release. According to the Stockearning algorithm, the predicted volatility on the first day is +/-3%, while the predicted volatility on the seventh day is +/-5%.

What analysts are saying: BMO analyst David Gagliano raised his price target on Commercial Metals Company from$40 to $45 and maintained a hold rating on the shares. In a research note, the analyst told investors that "resilient" profits and volumes drove the firm's better-than-expected second-quarter results. Despite the enhanced operational and regional demand concerns, Gagliano expects long-product metal spreads to continue being high in the near run, with downstream product profits increasing as better lagged contract prices keep flowing through results.

Exane BNP Paribas analyst Seth Rosenfeld upgraded the stock from Hold to Buy and set a price target of $45. Also, KeyBank analyst Philip Gibbs upgraded the stock from Hold to Buy with a price target. Gibbs cited strong pricing power, Ingra optionality, and M&A.

Recently Citi analyst Alexander Hacking raised the company’s price target from $34 to $38 and kept a Hold rating on the shares. The researcher revised his model to account for scrap and realized steel prices. According to Hacking in a research note, the change is mostly driven by improving structural metal spreads over the quarter. He maintains a Hold rating on the stock but admits that the stock's near-term prognosis looks fairly positive, with a consolidated industry, low import pressures, and a "generally good" forecast for non-residential development in the United States.

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Neha has a passion for understanding the real value of stocks in publicly traded markets. She has a BA in Finance and a Masters in microeconomics. Anne has worked as a consultant advising buy-side firms and long-only equity fund managers. At stocksearning.com, she anchors our fundamental research writing desk.

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