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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.

Foot Locker Inc. (NYSE: FL) Expects FY 2022 Sales to Drop 4% to 6%

Posted on Feb 28, 2022 by Neha Gupta

Foot Locker Inc. (NYSE: FL) Expects FY 2022 Sales to Drop 4% to 6%

Foot Locker Inc. (NYSE: FL) released its Q4 2021 earnings and revenue results on Friday, February 25, 2021, in which the company reported solid results reflecting the momentum the company has created amid changing market conditions.

What to look for: The company indicated that it would no longer be able to sell many products from Nike, its top vendor. The footwear retailer indicated that from Q4 2022, no single vendor would account for more than 55% of purchases relative to 65% a year before. For FY 2022, the company doesn't expect Nike supplies to exceed 60% of its total purchase. This comes as Nike ramps up its direct-to-consumer efforts in a bid to earn high-profit margins. Management said that Foot Locker would be leaning toward its current relationships with other brands such as Puma, Timberland, Addidas, and Crocs.

Earnings: Stockearnings’s estimated EPS was $1.44, but the company posted adjusted earnings of $1.67 per share. Net income for the quarter was $102 million or $1.02 per share, dropping from $123 million or $1.17 per share a year ago. Foot Locker reported a net income of $893 million or $8.61 per share in FY 2021, a YoY increase of 179.5%. On a non-GAAP basis, the company has earnings of $7.71 per share for the whole year, increasing from $2.81 a year before. Historical EPS Performance for the past 12 quarters shows that the company has topped estimates 29 times (78%), matched once (2%), and missed seven times (18%).

Revenue: Sales were up 6.9% in the fourth quarter to $2.34 billion, topping estimates of $2.33 billion. For the whole year, comparable-store sales were up 15.4% YoY. Foot Locker reported total sales of $9 billion in FY 2021 compared to $7.5 billion a year before, representing a YoY increase of 18.7%. The company issued a bleak outlook for FY 2022, stating that it expects sales to drop 4% to 6%, with comparable-store sales expected to drop 8% to 10%. Analysts were looking for YoY revenue growth of 2%.

Stock movement: Foot Locker shares have lost 29.8% since the company released its last earnings release. Interestingly, following the earnings release, the company’s shares have been UP 27 times in the past 47 quarters. So, the historical price reaction suggests a 57% probability of the share price going UP following the earnings release. According to the Stockearning algorithm, the predicted volatility on the first day is +/-8%, while the predicted volatility on the seventh day is +/-8%.

What analysts are saying: Seaport Global analyst Mitch Kummetz downgraded the stock from Buy to Hold, stating that his Nike risk thesis was flawed, and he is unconvinced in the figures and story. According to the analyst, Foot Locker missed Q4 sales and EBIT, but EPS topped consensus thanks to a 20c GOAT profit and a lower-than-expected tax rate. The company also gave a full-year estimate for 2022 that was substantially below consensus and pre-COVID levels. The major news, in his perspective, is that the company's Nike purchases are declining, which Kummetz did not anticipate. This danger was the analyst's principal bearish forecast on Foot Locker hence his bull thesis was predicated on the exaggerated risk.

Morgan Stanley’s Kimberly Greenberger downgraded the stock from Hold to Sell and also slashed her price target from $47 to $23 after the company announced a strategy shift to diversify vendor and merchandise mix. She said that Nike's shift to DTC strategy impairs the company's cash generation potential, which might affect revenue.

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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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