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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.

Home Depot Inc. (NYSE: HD) Expects Earnings of $3.2 Per Share in Q4 2022

Posted on Feb 21, 2022 by Neha Gupta

Home Depot Inc. (NYSE: HD) Expects Earnings of $3.2 Per Share in Q4 2022

Home Depot Inc. (NYSE: HD) has confirmed the release date for its Q4 2022 earnings report, which is on Tuesday, February 22, 2022, before the market opens.

What to look for: The company has done well in meeting the growing demand for home improvement. During the pandemic, people spent the most time at home, taking on making time at home more productive and enjoyable. There have been concerns that there will be a sharp drop in Home Depot sales with the reopening of the economy. Therefore when the company releases its Q4 2022 results, investors will be keen on consumer trends and management's outlook for 2022.

Earnings: Stockearning’s Estimated EPS is expected to be around $3.2 per share, representing a YoY change of 16.8%. In the last quarter, the company produced an earnings surprise of 14.96% with an EPS of $3.92. Historical EPS Performance for the past 12 quarters indicate that the company has beat estimates 34 times (94%), met once (2%) and missed once (2%).

Revenue: In the fourth quarter, the company anticipates sales of $34.61 billion, suggesting a 7.3% increase. For the quarter ended October, the company reported a sales growth of 9.8%. Several macroeconomics factors favour HD, , including high prevalence for work from home, increasing home prices, and limited home inventories for sale.

Stock movement: Home Depot shares have lost 5.3% since the company released its third-quarter earnings. Interestingly, the company's shares have been UP 24 times out of the past 48 quarters. So, the historical price reaction suggests a 50% probability of the share price going UP following the fiscal Q4 2022 earnings release. According to the Stockearning algorithm, the predicted first-day move is +/-2%, while the predicted move on the seventh day is +/-3%.

What analysts are saying: JPMorgan analyst Christopher Horvers slashed his price target on the stock from $413 to $406 but maintained a buy rating on the stock. In a research note, the analyts told investorse that the consumer environment is supportive but seems to be slower than 2021 and 2020. He feels that the recent rate moves may increase the risk for an additional giveback in the company's share.

Truist analyst Scot Ciccarelli commenced coverage, upgraded the stock from Hold to Buy,, and raised his price target from $420 to $448. According to the analyst, key industry dynamics are demand/supply imbalances, pandemic-driven consumer changes, the housing market, and ageing housing infrastructure, which are all driving significant additional home renovation growth. In addition Ciccarelli said that the company will continue to gain market share as a result of its size/scale advantages and improved supply chain capabilities.

Wells Fargo analyst Zachary Fadem raised his price target on the HD from $420 to $460 and maintained a Buy rating on the shares. The analyst feels Home Improvement firms are better placed to endure inflation due to recurrent, less-discretionary acquisitions, share gains, opaque pricing, and scale benefits.

DA Davidson’s Michael Baker increased his price target on HD from £395 to $420 and maintained a Hold rating on the stock as part of a wider research note to investors in Broadlines/Retailing and Hardlines Category. While the analyst claims that he is not making any "significant" adjustments to his estimates, the modifications in his price objective represent a forward wrap in valuation models to estimated earnings in 2023.

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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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