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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.

RPM International Inc. (NASDAQ: RPM) Earnings Expectations, Fiscal Q2 2022 Revenue of $1.5 Billion

Posted on Jan 05, 2022 by Neha Gupta

RPM International Inc. (NASDAQ: RPM) Earnings Expectations, Fiscal Q2 2022 Revenue of $1.5 Billion

RPM International Inc. (NASDAQ: RPM) has confirmed that it will release its fiscal Q2 2022 earnings on Wednesday, January 5, 2022, before market open.

What to look for

Earnings: Stockearning’s estimated EPS for fiscal Q2 2022 is expected to be around $0.86 per share, representing a YoY increase of 18%. In the last quarter, the company produced an earnings surprise of 8% with actual EPS of $1.08 relative to consensus estimates of $1. Historical EPS Performance shows that in the past 12 quarters, the company has topped estimates eleven times (91%) and missed once (8%).

Revenue: For the current quarter under review, the company which produces, sells, and markets various chemical compounds is expected to post revenue of $1.5 billion representing a 4% YoY increase from $1.49 billion.

Stock movement: RPM shares have gained 23.7% since the company released its last quarter earnings. Notably, RPM shares have been DOWN 24 times out of the past 47 quarters. So, the historical price reaction suggests a 51% probability of the share price going DOWN once the company reports its fiscal Q2 2022 earnings. According to the Stockearning algorithm, the predicted first-day move is 2%, while the predicted move on the seventh day is 3%.

What analysts are saying

RPM was downgraded from Buy to Hold by Vertical Research analyst Kevin McCarthy, who set a price target of $96. While the company is anticipated to recover for the rest of fiscal 2022 and into 2023, McCarthy cautions investors that the "trajectory is arguable" due to supply chain difficulties' intrinsic volatility and continuous cost inflation, and expectations appear to be high. According to the analyst, comparisons are becoming increasingly tough, and his EPS expectations for RPM remains "slightly below consensus."

RBC Capital analyst Arun Viswanathan reduced RPM's price target from $89 to $87, maintaining a Sector Perform rating on the stock. The analyst cites the impact of raw - materials inflation and supply chain interruptions in lowering his FY21 and FY22 EPS estimates by 7c and 6c, respectively, to $3.96 and $4.69. However, Viswanathan adds that if demand continues resilient following supply chain constraints, driving EBITDA margins closer to 15% -16%, he might become more bullish on RPM.

BMO Capital’s John McNulty slashed his price target on the stock from $197 to $100 but maintained a "Buy" rating on the stock. According to the analyst, the company's Q4 results revealed certain near-term difficulties, including a "precarious" raw - materials situation amid considerable inflation. However, according to McNulty, the "bad news is well understood," and he expects the company's shares to continue to thrive as it continues to execute on its development strategy.

Wells Fargo analyst Michael Sison reduced RPM’s rating from “Buy” to “Hold” and lowered the price target from $104 to $95. The analyst anticipates the company's near-term results to be hampered by persistent margin pressure from raw material and input shortages, "capping upside potential in the shares." However, Sison sees a limited possibility for a favorable surprise from RPM's consumer segment until the second half of fiscal 2022, owing to "structural headwinds and the lag in price increases to flow through the businesses," as well as "strong demand" and low inventories across the construction, industrial, and specialty products facing segments.

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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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