Earning seasons provides excellent trading opportunities especially for option traders. Before moving further, let me reinforce that earnings outcome is largely a 50/50 probability event. Stock prices move wildly depending upon various parameters and it’s very tough, if not impossible, for someone to make a sure speculation about the outcome of the event. Hence, generally speaking, almost every directional trade has only a 50/50 probability of being a winning trade. Even though earnings’ trading can offer phenomenal results, you should not trade earning event using options if you are not sure of what you are doing.
During JAS 2012, I traded quite a few underlying for earnings (outcome is listed on the right side bar) but I slowed trading earnings during OND 2012 as I was expecting volatility environment not to be supportive. There were a lot of other factors that were making it challenging to play earnings and thus I traded earnings at minimum. Staying out of markets is a strategic choice as well. However, this season is going to be an interesting one as key companies are about to start reporting. On my list, I have about 118 companies that are going to announce earnings during next 10 days. Out of these 118 companies, ~80% of the companies already reflect implied move in accordance to the recent past. Besides implied volatility, outlook is also going to define how markets respond to earning announcements. Revenue will largely be miss in comparison to past announcements and I not very optimistic about the profit margins either.
The expectations on earnings have been steadily coming down over the last three months and are barely in positive territory now. Total earnings in the fourth quarter are expected to be up +0.4% from the same period last year. This is a sharp drop from the roughly +7% earnings growth rate that consensus expected just three months ago.
Inspite of all this mumbo jumbo, only 3 companies out of 118 have consensus rating below 3 (none below 2.5) where 5 is equivalent of Strong Buy and 1 equivalent to Strong Sell!!
One of OP alum, Kim Klaiman, has an earning focused newsletter called SteadyOptions. If you are looking for something on the earnings alone, you may want to check that out.
During last earning announcement AAPL lowered EPS guidance to $11.75 vs. then estimates of $15.53 and revenue estimated were guided lower to $52 billion vs. then estimate of $54.95 billions. Current EPS estimates on AAPL vary from $12 to $15.50. I shall share a detailed review of AAPL separately. You may want to read some of my past reviews on AAPL earnings.
Regardless, it’s going to be an interesting earning season. There will still be plentiful opportunity to trade and make some money from these uncertain certainties and I shall be sharing high probability traded in the coming days/weeks. Just to reinforce, earning trades are covered under OPNExtra! which is FREE for the OPN members and is not available for others.
If you are not an OPNewsletter member, this probably will be one of the most interesting years to join. For those who may be interested in following me on Twitter, you can find @OptionPundit at Twitter.com/OptionPundit
Happy Trading, OP