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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.

Amazon.com Inc. (NASDAQ: AMZN) Expects Q4 2021 EPS of $3.88 on Revenue of $137 Billion

Posted on Feb 03, 2022 by Neha Gupta

Amazon.com Inc. (NASDAQ: AMZN) Expects Q4 2021 EPS of $3.88 on Revenue of $137 Billion

Amazon.com Inc. (NASDAQ: AMZN) has confirmed that it will release its Q4 earnings report on Thursday, February 3, 2022, after market close.

What to look for

The company is likely to post record Q4 2021 revenue when it reports its earnings on Thursday, but profit is expected to drop from a year ago, attributed in part to high costs. When the company released its Q3 earnings, CEO Andy Jassy stated that the e-commerce retailer expected costs to increase by billions of dollars during the holiday quarter as the company faces supply-chain shortages, labor shortages, high shipping costs, and wages.

Earnings: Stockearning’s estimated EPS for the fourth quarter is around $3.88 per share. In the third quarter, the company reported a net income of $3.2 billion or $6.12 per diluted share, missing on estimates of $9.10 per share. Historical EPS performance shows that the company has, in the past 12 quarters, topped estimates eight times (66%) and missed four times (33%).

Revenue: The e-commerce giant expects quarterly revenue of $137.73 billion in the fourth quarter. In the third quarter, net sales were up 15% to $110.8 billion relative to $96.1 billion in Q3 2020.

Stock movement: AMZN shares have lost 16.5% since the company released its third-quarter earnings. Interestingly, AMZN shares have been DOWN 25 times out of the past 47 quarters. So, the historical price reaction suggests a 53% probability of the share price going DOWN once the company reports its fiscal Q4 2021 earnings. According to the Stockearning algorithm, the predicted first-day move is 6%, while the predicted move on the seventh day is 6%.

What analysts are saying

Credit Suisse analyst Stephen Ju slashed his price target on AMZN from $4,100 to $4,000 but maintained a Buy rating on the stock. In a research note, the analyst told investors that with the anticipated retention of seasonal fourth-quarter hiring into this year, he thinks the e-commerce giant is a step closer to witnessing an enhanced proliferation of quick delivery at the end of two years of capacity constraints.

BMO Capital analysts Daniel Salmon also slashed his price target on AMZN from $4,100 to $3,600 but maintained a Buy rating in the stock. The analyst is also lowering his FY22 EPS forecast from $65.04 to $42.99 to reflect his anticipations for lower digital store and third-party vendor revenues in 2022 and 2023 as a result of continuing supply chain constraints both locally and internationally, as well as lower profits in 2022 and 2023 to accurately represent continual investments in the fulfillment network, and to accurately reflect tough comps. On the other hand, Salmon believes that AWS will see high demand following COVID-19 and that Amazon will continue to spearhead the rise of "Retail Media."

Mizuho analyst James Lee lowered his fiscal 2022 EBITDA projection by 6% but maintained a Buy rating and price target of $3,950. The analyst’s advertising call indicated that daily advert spending growth per advertiser decelerated YoY in Q4 by 32 points to 10% because of tough comps from last year's Prime Day and supply chain headwinds, increased logistics costs, and growing inventory and labor costs. Lee sees the Q1 consensus estimates as aggressive and has an operating income projection of 10% below consensus. The analyst expects headwinds to ease in2H 2022 since most incremental costs are short-term.

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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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