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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.

DraftKings (NASDAQ: DKNG) Predicts Wider-Than-Anticipated Loss in 2022

Posted on Feb 22, 2022 by Neha Gupta

DraftKings (NASDAQ: DKNG) Predicts Wider-Than-Anticipated Loss in 2022

DraftKings (NASDAQ: DKNG) released its earnings and revenue result for Q4 2021 on Friday, February 18, 2022, posting YoY quarterly growth of 47% in revenue, but shares still lost after the company predicated wider than anticipated loss for 2022.

What to look for: The company indicated that it could attain profitability through one financial metric in late next year, but a wider than anticipated loss projection for 2022 overshadowed this. The company faces stiff inline sports gambling competition. In addition, the expansion to new markets and the launch of offerings in these new markets contributed to widening losses.

Earnings: Stockearning’s Estimated EPS was a loss of $0.81 per share, but the company topped that with an actual EPS loss of $0.35 per share. In the third quarter, the company reported actual EPS of $1.35, missing estimates by 21.62%. For the past 12 quarters, historical EPS indicates that the company has missed estimates in 7 quarters (100%) and has never topped estimates. DraftKings expects an adjusted EBITDA loss of between $825 million and $925 million in 2022.

Revenue: In the fourth quarter, the company had revenue of $473 million, 47% YoY growth, topping analysts' consensus estimates of $439 million. The company exceeded the revenue forecast it had issued in the third quarter, in which it expected revenue to grow by 8%. For full-year 2022, the company now expects revenue to be between $1.85 billion and $2 billion, in line with consensus predictions of $1.9 billion.

Stock Movement: DKNG shares have lost 50.6% since the company released its third-quarter earnings. Interestingly, the company's shares have been UP 4 times out of the past seven quarters. So, the historical price reaction suggests a 57% probability of the share price going UP following the fiscal Q4 2021 earnings release. According to the Stockearning algorithm, the predicted volatility on the first day is +/-6%, while the predicted volatility on the seventh day is +/-11%.

What analysts are saying: Benchmark analyst Mike Hickey slashed his price target on DKNG from $50 to $26 but kept a Buy rating in the shares after the Q4 earnings release. While Hickey stated that the DraftKings provided better-than-anticipated results, beating consensus revenue and earnings estimates, he also stated that it announced an adjusted EBITDA estimate that fell short of expectations. DraftKings showed vision into future profitability, according to the analyst, but short-term adjusted EBITDA loss overwhelmed the firm's revenue growth.

Roth Capital analyst Edward Engel was cautious on DKNG ahead of the earnings results and considered the stock’s recent bounce as an appealing shorting chance. While he estimates DraftKings' Q4 GGR climbed 70% year over year, the midpoint of the company's forecast suggests net revenue increased 105% sequentially. According to guidance/street estimates, the ratio of NGR to GGR will return to levels seen in 1H 2021, Engel said. However, according to state-reported NGR data, promos have stayed high since September, bolstering his confidence in a Q4 miss. The analyst rates the stock as a Sell with a $23 price target.

Oppenheimer analyst Jed Kelly slashed his price target on the stock from $70 to $35 but maintained a Buy rating on the shares. According to the analyst, additional state debuts, Oregon exclusivity, quick OSB acceptance, and efficient cross-selling into NFT platforms are expected to boost revenue in 2022. The analyst points out that OSB is still in the early stages of its growth cycle, with management preferring long-term share growth over short-term earnings to boost the short-term share price.

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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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