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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.

PepsiCo Inc. (NASDAQ: PEP) Beats Q4 2021 Revenue Estimates by $1 Billion

Posted on Feb 11, 2022 by Neha Gupta

PepsiCo Inc. (NASDAQ: PEP) Beats Q4 2021 Revenue Estimates by $1 Billion

PepsiCo Inc. (NASDAQ: PEP) released its Q4 2021 earnings report on Thursday, February 10, 2022, beating revenue expectations, but the stock dropped 2.5% to $167.66.

What to look for: The company is experiencing the impacts of inflation across all segments. For instance, with Frito-Lay North America, the company has had to pay more for packaging and cooking oil. Also, commodities and transportation have become pricier. However, the company is passing higher costs to consumers, and the price of some of its products has already increased. CFO Hugh Johnston stated that despite then cost challenges, PepsiCo has pricing power and brand loyalty which will get the company through 2022 with margins being intact.

Earnings: Stockearning’s Estimated EPS was $.52 per share, but the soft drinks and snacks company reported adjusted earnings per share of $1.53 in Q4 2021. The company's net income in Q4 was $1.32 billion or $0.95 per share compared to net income of $1.85 billion or $1.33 per share in Q4 2020. For Fiscal 2022 the company expects earnings of $6.67 per share, which is short of Stockearning’s Estimated EPS of $6.73 per share. However, historical EPS Performance in the past 12 quarters indicates that the company has topped earnings estimates in all 12 quarters.

Revenue: The company’s revenue exceeded expectations by $1 billion at $25.25 billion compared to Wall Street projections at $24.24 billion. A year ago, the company reported revenue of $22.5 billion. Organic revenue stripping from divestitures and acquisitions was up 11.9%. For fiscal 2022 the company expects organic revenue to jump 6%, topping analysts estimates of 5.4%. In addition, PepsiCo has raised its yearly dividend by 7% from$4.3 to $4.6 per share, and the board has approved a share repurchase program of $10 billion for the next four years.

Stock movement: PEP shares have gained 14.5% since the company released its third-quarter earnings. Interestingly, PEP shares have been UP 27 times out of the past 46 quarters. So, the historical price reaction suggests a 58% probability of the share price going UP following the fiscal Q4 2021 earnings release. According to the Stockearning algorithm, the predicted first-day move is 1%, while the predicted move on the seventh day is 2%.

What analysts are saying: Morgan Stanley analyst Dara Mohsenian increased his price target on PEP from $172 to $188 and maintained a Buy rating on the stock. The analyst feels that with favourable execution changes, a mix change to high growth snacks and international operations, and improving beverage trends, the company has sustainably expedited organic sales growth. He added that despite the almost 1000 basis points outperformance in stock since the start of November relative to the S&P 500, he still likes Pepsi ahead of the solid Q4 2021 report and in-line 2022 sales outlook.

JPMorgan analyst Andrea Teixeira increased his price target on the stock from $171 to $185 and maintained a Buy rating ahead of the Q4 2021 earnings release. The analyst indicated that she expected underlying consumer demand to remain strong, and the company's additional pricing actions in the fall started to flow in Q4. Interestingly she feels PEP is a core staples holding.

Also, Credit Suisse analyst Kaumil Gajrawala raised his price target in PepsiCo from $157 to $166 and maintained a hold rating on the shares. The analyst contends that the company's robust pandemic execution sets it will make relative to competitors steering the turbulent labour and sourcing environment. Gujranwala sees PEP as a safe haven amid secular and macro volatile and expects margin pressure to dominate in the coming months.

Related News

Amgen Inc. (NASDAQ: AMGN) Earnings Expectations, Q4 2021 EPS of $4.11 On Revenue of $6.91 Billion

Bristol-Myers Squibb Company (NYSE: BMY) Expects Q4 2021 EPS of $1.84 on revenue of $12 Billion

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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