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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.

SMART Global Holdings Inc. (NASDAQ: SGH) Expects Revenue of $440 Million to $480 Million In Fiscal Q1 2022

Posted on Dec 24, 2021 by Neha Gupta

SMART Global Holdings Inc. (NASDAQ: SGH) Expects Revenue of $440 Million to $480 Million In Fiscal Q1 2022

SMART Global Holdings Inc. (NASDAQ: SGH) has confirmed the date for its fiscal Q1 2022 earnings release, which will be on Tuesday, January 4, 2021.

What to look for

SMART Global is expected to double its profits in the next few years, which is an amazing opportunity, and the market is priced in the stock's positive outlook. The company deals with the design, production, and sales of memory services and solutions in the electronics sector. It had a product line including Flash memory and DRAM technologies.

Earnings: Stockearning’s Estimated EPS is expected to range between $1 and $.4 per share for the current quarter under review. In the fourth quarter, the company reported GAAP EPS of $0.78, representing a YoY increase of 160%, and non-GAAP EPS of $2.16, up 163% YoY. Historical EPS Performance for the past 12 quarters indicates that the company had beat estimates seven times (58%) and missed five times (41%).

Revenue: In the fourth quarter, the company had net sales of $467.7 million, up 57% YoY, while net sales for the whole year were $1.5 billion, increasing 34% from fiscal 2020. For the fiscal Q1 2022, the company expected revenue to range between $440 million and $480 million.

Stock movement: SGH shares have gained 38.6% since the company released its Q4 2021. Interestingly, SMART Global shares have been UP 11 times out of the past 17 quarters. So, the historical price reaction suggests a 64% probability of the share price going UP once SGH reports its fiscal Q1 2022 earnings. According to the Stockearning algorithm, the predicted first-day move is 11%, while the predicted move on the seventh day is 12%.

What analysts are saying

Needham analyst Rajvindra Gill raised his price target on the stock from $75 to $85 and maintained a "Buy" rating on SMART Global shares following the previous quarter's earnings beat. In a research note, the analyst told investors that the company's gross margins were the highlight of Q4 2021 since they were materially higher than anticipated as SMART Global transforms its operations to become an AI system implementation leader. Gill added that the company is not a "Brazil memory story" anymore as the company's business presently accounts for around 25% of its sales.

Also, Deutsche Bank analyst Sidney Ho has raised the research firm's target price on SGH shares from $66 to $70 and maintained a "Buy" rating on the stock post Q4 earnings results release. Ho said that although revenue was in line with his expectations, the most impressive thing with the stock was the improvement of gross margin. In a research note, the analyst told investors that SMART Global expects improvement to continue with significant upside to a new target range. Most importantly, Ho is “encouraged with the transformation story” of SGH and sees much potential for the stock moving higher.

Jefferies analyst Mark Lipacis also raised his price target on the stock from $665 to $72 and maintained a "Buy" rating on the stock, dubbing it a "transformational play” following the EPS beat in the last two quarters. While Lipacis' view is that most investors see SMART Global as a Brazil memory firm, he expects 20% CAGR for the company's Intelligent Platform Solutions and sees the diversification from Brazil as encouraging considering other businesses are more profitable, and this shift will make the company less reliant in an emerging market.

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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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