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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.

Microsoft Corp (NASDAQ: MSFT) Earnings Expectation, Q2 2022 EPS of $2.29 on revenue of $50.32 Billion

Posted on Jan 25, 2022 by Neha Gupta

Microsoft Corp (NASDAQ: MSFT) Earnings Expectation, Q2 2022 EPS of $2.29 on revenue of $50.32 Billion

Microsoft Corp (NASDAQ: MSFT) has confirmed the date for its quarterly earnings release, which will be on Tuesday, January 25, 2022, after market close.

What to look for

The ongoing strength of Azure, Microsoft's cloud computing platform, is expected to positively impact Q2 numbers. Most importantly, Azure has witnessed accelerated adoption attributed to digital transformation acceleration by companies globally. Also, the company's workspace communication offering, Teams, has witnessed growing momentum, which will act as a tailwind in the quarter under review. The strong Azure demand and solid Teams uptick are installing confidence among investors.

Earnings: Stockearning’s Estimated EPS for Q2 2022 is expected to be around $2.29 per share suggesting growth of $12.81% per share. A year ago, the company had an EPS of $2.03. In the last quarter, the company produced a 10.19% earnings surprise with an EPS of $2.27. Historical EPS Performance in the past 12 quarters indicates that the company has topped earnings estimates 12 times (100%).

Revenue: the company is expected to report revenues of $50.32 billion, suggesting a 16.82% YoY growth. In the first quarter, the company reported revenue of $45.3 billion, representing an increase of 22%. In addition, operating income was up 27% to $20.2 billion.

Stock movement: MSFT shares have lost 4.1% since the company released its first-quarter earnings. Interestingly, MSFT shares have been UP 29 times out of the past 47 quarters. So, the historical price reaction suggests a 61% probability of the share price going UP once the company reports its fiscal Q2 2022 earnings. According to the Stockearning algorithm, the predicted first-day move is 3%, while the predicted move on the seventh day is 4%.

What analysts are saying

BoA analyst Brad Sills told clients in a note that they believe MSFT is better positioned to create sustained low-digit growth in the next three to five years attributed to the ongoing adoption of Azure cloud computing platform, Office 365 productive suite, and profitable Game Pass and games revenue in Xbox.

He is optimistic about the performance of MSFT's segments. For example, he predicted that Azure, Microsoft's cloud segment, could rise by much to 49 percent, exceeding his previous forecast of 46 percent. In addition, beyond his forecast of $16.6 billion for the segment, the More Personal Computing division, including hardware, could create extra revenues of $250 million.

Sills expects Microsoft will post $50.7 billion in sales for the Q2 of 2022, up 17.6 percent YoY, when it reports earnings on January 25. Also, the analyst increased Microsoft's revenue numbers for Q2 and Q2 to $47.7 billion from $47.3 billion and $52 billion from $51.4 billion, respectively. However, he did not change his price objective of $365 per share.

Cowen analyst Derrick Wood holds a similar viewpoint. He predicted that Azure would continue fueling Microsoft's future growth and that Office 365, the company's cloud productivity suite, would be the largest software-as-a-service business globally. Derrick has a price target of $360 on the stock.

However, Citi's Tyler Radke offered a dissenting viewpoint. Radke disagrees with Microsoft's positive assessment of its cloud business. Because of fewer bookings in Q1 2022, he believes Azure, Microsoft's cloud subsidiary, will slow considerably in contrast to 2021's performance. Meanwhile, he expects Microsoft's earnings to be driven by Office 365 and Dynamics. Radke also dropped his price target from $407 to $376 and lowered his profits projection for this fiscal 2022 from $9.72 to $9.69.

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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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