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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.

Zoom Video Communication Inc. (NASDAQ: ZM) Beats Q4 2022 Earnings Expectation And Steady Sales

Posted on Mar 01, 2022 by Neha Gupta

Zoom Video Communication Inc. (NASDAQ: ZM) Beats Q4 2022 Earnings Expectation And Steady Sales

Zoom Video Communication Inc. (NASDAQ: ZM) announced its Q4 2022 earnings and revenue results on Monday, February 28, 2022, in which earnings topped expectations, but sales were steady.

What to look for: the company’s revenue slowed as people started to return to work and clients erased purchases of the remote work software. At the end of January, the company had 509,800 clients with more than ten employees, dropping from 512,100 at the end of the previous quarter. Zoom will stop reporting the number starting in this quarter. In the future, the company expects customers to continue modifying how they operate and interact with their clients, so Zoom expects to address a large market. From now on, the company will be disclosing enterprise customers numbers and net dollar expansion rate among the clients.

Earnings: Stockearning’s Estimated EPS for the fourth quarter was $1.06 per share, but the company topped the figure with an EPS of $1.29 per share. Net income was $490.5 million or $1.6 per share relative to $260.4 million or $0.87 per share a year ago. For the full year, the company had net income attributable to shareholders of $1.375 billion or $4.50 per share compared to $671.5 million or $2.25 per share in FY 2021. Historical EPS performance shows that in the past 12 quarters, the company has topped estimates eleven times (100%) and never missed.

Revenue: For the quarter ending January, the company ireported a 21% revenue increase from last year but a 35% deceleration from the previous quarter. Q4 2022 revenue was $1.071 billion, up from $882.5 million in Q4 2021. Revenue topped FactSet polled analysts' estimates of $1.05 billion. For the current fiscal year, the company expects revenue to be between $4.53 billion and $4.55 billion, which is a 10.7% growth but shy of analysts' expectation of revenue of $4.71 billion.

Stock movement: ZM shares have lost 48.3% since the company released its last earnings release. Interestingly, following the earnings release, the company’s shares have been DOWN 7 times in the past 11 quarters. So, the historical price reaction suggests a 63% probability of the share price going DOWN following the earnings release. According to the Stockearning algorithm, the predicted volatility on the first day is +/-10%, while the predicted volatility on the seventh day is +/-10%.

What analysts are saying: UBS analyst Karl Keirstead slashed his price target on the stock from $250 to $130 but maintained a Hold rating in the stock ahead of the earnings release. Despite the 35% YTD stock decline, Keirstead recommends being on the sideline considering his concerns regarding US market saturation, price compression, and competition from Microsoft Teams.

Citi analyst Tyler Radker slashed his target on the stock from $250 to $147 and maintained a Hold rating on the stock. The analyst believes the stock has a "difficult set-up" heading into Q4 results. Notwithstanding higher "level-set expectations" for fiscal Q4 2022 and the stock's considerable underperformance, the analyst says he's staying on the sidelines, concerned about slowing growth and probable downside to the original fiscal 2022 forecast.

Baird analyst William Power slashed his price target on the stock from$250 to $190 but maintained a Buy rating on the shares. The analyst discussed the impending quarterly earnings results and stated that he prefers the long-term risk/reward and feels that business momentum could alleviate certain growth worries, but that consensus could be too high.

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Zoom Video Communications Inc. (NASDAQ: ZM) Earning Expectations, Full-Year Revenue of $4.079 Billion to $4.081 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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