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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.

Roku Inc. (NASDAQ: ROKU) Reports Revenue of $865.3 Million In 4, 2021, Short of Estimates

Posted on Feb 20, 2022 by Neha Gupta

Roku Inc. (NASDAQ: ROKU) Reports Revenue of $865.3 Million In 4, 2021, Short of Estimates

Roku Inc. (NASDAQ: ROKU) released its Q4 2021 earnings and revenue report on Thursday, February 17, 2022, with earnings topping estimates while revenue came short of estimates.

What to look for: During the fourth quarter, revenue missed expectations, and management warned of continued supply chain challenges. As a result, TV unit sales dropped below pre-pandemic levels just like in the third quarter. In addition, some of the company's TV OEM partners experienced inventory challenges which affected units sales and market share in the fourth quarter. Although these market conditions are likely to result in high player-related costs in the short term, management doesn't see these conditions being permanent.

Earnings: Stockearning’s Estimated EPS was pegged at $0.05, but the company reported EPS of $0.17 per share. In the third quarter, the company produced an earnings surprise of 700% with an EPS of $0.48. Historical EPS Performance for the past 12 quarters indicates that the company has topped estimates 16 times (94%) and missed once (5%).

Revenue: Revenue was up 33% in the fourth quarter compared to 51% in the third quarter and 81% in the second quarter. The company had revenue of $865.3 million compared to $894 million predicted by analysts. For the first quarter, the company expects revenue of $720 million, implying a 25% revenue growth. As a result, the company is calling for an adjusted EBITDA of $55 million below analysts’ estimates. For fiscal 2022 the company anticipates revenue to grow in the mid-30’s percentage range.

Stock movement: ROKU shares have dropped 48.5% since its last quarter earnings. Interestingly, the company's shares have been DOWN 9 times out of the last 17 quarters following the earnings release. So, the historical price reaction suggests a 53% probability of the share price going DOWN following the fiscal Q4 2021 earnings release. According to the Stockearning algorithm, the predicted volatility on the first day is +/-13%, while the predicted volatility on the seventh day is +/-15%.

What analysts are saying: Pivotal Research analyst Jeffrey Wlodarczak downgraded ROKU from Hold to Sell and slashed the price target from $350 to $95. In a research note, Wlodarczak says the company had an "overall mixed" Q4 because it released a lower-than-expected revenue forecast for 2022 and opted to "massively ramp" operational costs, which pushed EBITDA guidance considerably below expectations. In essence, Roku will increase revenue at a slower pace than predicted, along with a large increase in expenses, perhaps leading to a worldwide economic slowdown and increased competition, according to the analyst.

Wedbush analyst Michael Pachter slashed his price target from $365 to $220 as he revises valuation on the post-pandemic decline while maintaining a Buy rating in the stock. According to the analyst, Roku did a "phenomenal job" expanding its customer base throughout the epidemic and has boosted revenue per user enough for it to be profitable.

However, according to Pachter, active user account growth "significantly slowed" in the 2H 2021 as Roku's TV OEM suppliers struggled to deliver TVs to market because to supply chain disruptions and component shortages, as well as customers spending more time outside the home as lockdowns got lifted. Nonetheless, he believes that once the supply chain disruptions subside, probably in early to mid-2022, subscriber growth will pick up again, accompanied by OEM and store discounts.

Related News

Dropbox Inc. (NASDAQ: DBX) Tops Q4 2021 Earnings and Revenue Estimates.

Williams Companies Inc. (NYSE: WMB) Expects EPS of $0.31 in Q4 2021 and Revenue of $2.71 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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