Analyzing our earnings plays

[Conqueror]

So I was pretty vocal about my analysis of the earnings plays for RH, LULU & CHWY.

• RH - I was supremely bearish and thought this stock is overvalued and should dump.
• LULU - I was supremely bearish and thought this stock is overvalued and should dump. This was also my pick for most overalued.
• CHWY - I was least bearish on this play and figured it was close to bottom.

So let’s take a look at the outcomes:

Outcomes

RH

Reaction: RH spiked immediately upon release of earnings. This purchase happened so fast that there is almost no way the entirety of the earnings results were processed making the run up almost certainty simply off a reading of the release headlines. RH released that they had “record” revenue and they beat EPS. The general headlines also stated that they raised guidance as well.

The Call: Unfortunately I was not on the call for the other two, however, I can speak on RH and use some past experiences for examples instead later on The call in RH’s case was abysmal. The CEO was unprofessional, full of himself and only offered information pertaining to his lavish lifestyle. Analysts were shut down numerous times when pressing for material information about the state of the company but eventual were able to get the concession that they were “behind on growth”.

The Aftermath:

Analysts mostly gave RH upgrades and had a general bullish sentiment. However, if we look at the chart we can see a different story on earnings reception which is a continued sharp downtrend that effectively erases all the gains off the earnings release. Directionally it would appear, @Navi and I were right about the underlying fundamentals of their earnings and this stock, which is 96% held by institutions has been selling off in quick fashion despite a SPY rally (indicating true selling pressure).

LULU

Reaction: Now again out the gate we’re met with a bullish jump off the news headlines that LULU had beaten EPS and Revenue as well as raised their guidance.

The Call: While I wasn’t on this call, I’m aware that some bearish aspects to the report were uncovered in the call and a selloff occurred as a result.

The Aftermath: LULU has struggled to form upward momentum most of the day, but has traded surprisingly flat.

CHWY

Reaction: CHWY dropped hard right off the bat. The company announced that they missed EPS estimates by a significant amount and that revenue was just “inline” with guidance. They also announced weaker guidance than expected.

The Call: Unfortunately wasn’t on this one either, but it doesn’t seem to have affected the stock price at all pas the initial drop.

The Aftermath: CHWY spiked a bit at open this AM, but has traded mostly sideways along with LULU. It’s possibly that what downward momentum they would’ve had is being offset by SPY, but that’s of course just a guess.

Thoughts

So looking at these plays individually, it’s clear what I got wrong about judging the earnings reactions. In the case of RH, we always expected them to beat their guidance and do well. The whisper indicated this and we never doubted it. But to our assumption, this didn’t matter and we pointed to DOCU several times as justification for this. However, we were missing a key factor that while DOCU did beat earnings… they lowered guidance:

RH reacted the way it did because the three parts of earnings all came up bullish. EPS, Revenue & Guidance. If we look to LULU and CHWY, we see the same thing. LULU came up bullish as well so the stock reacted in kind because that’s all the algos are reading. They’re not doing complex NLP on the whole thing in 10 seconds, they’re grabbing figures and trading directionally based on them. Then, like in LULU’s case, when the details are revealed in the call, further trading decisions are made which resulted in the sell off. Looking at CHWY, it’s clear why it dropped, earnings were atrocious making it, despite objectively being the least overvalued, the farthest drop we saw.

Conclusions

I think we have a better understanding of what is going on when playing earnings and what parts are important. There are three stages to earnings that should be played as three COMPLETELY separate plays to maximize profitability.

1. Pre-Earnings Sentiment - No matter what you think about the earnings potential of the company, the pre-earnings sentiment is by far the easiest part to play. We knew that RH was bullish sentiment days before the report and taking calls and playing that direction would’ve netted serious gains on IV alone. Even though we were bearish on the stock due to fundamentals, the play was calls during this phase. Post Phase Strat: Cut before the earnings call. Sentiment isn’t always dead on and you’ll want to capture profit because IV crush generally erases it all.

2. Earnings Release - We’re in the Matrix on this one. As far as I can tell, the three main points of earnings dominate the reaction here and your profitability. Playing the earnings release requires determining if a company will beat EPS, beat Revenue and raise Guidance and those three things are weighted far above P/E and other fundamentals. The reasoning is that the traders trading on those things aren’t likely selling right when earnings are released. They’re listening to the call, they’re making decisions. Overall this remains the riskiest and toughest part to play. Post Phase Strat: Gambles only as close to the money as you can afford. Taking positions super early is preferred to bake in some immunity to IV but if you get it wrong directionally as we did with RH it’s all meaningless. The best strat here might be to take your gamble position near open on day of release to beat out the last minute IV push and escape most of the danger of being directionally wrong. This is not the main part to play if you want to be a profitable trader, it’s the before and after.

3. Post Earnings Aftermath - Now this is where it gets interesting. Remember those predictions we made? Well, they’re right. Just not about the earnings sentiment, but we absolutely nailed the valuation concerns and state of the companies. After the dust settled with RH, the selloff from the institutional investors has begun. The stock went from a peak of $658 to a recent low of $582. For reference, you could’ve bought a 12/17 $600p for RH for $480 just after earnings. That put was worth $2,200 earlier today, a gain of 358%. But we weren’t just right about that, we’ve been consistently right about this and have been missing out of these gains almost constantly because we get in our feelings about playing phase 2. If we look to WISH, we were absolutely right there as well and the gains if we had taken puts AFTER the call even though it jumped were in the thousands of percent. TTCF was the same story. After the jump it traded sideways for a bit, but eventually came down all the same from a peak of $19 to a recent low of $14.80. Phase Strat: Play the real underlying fundamentals and sentiment directionally right after earnings. Take expirations that give you room and just let the money come in. We supremely missed most all of these plays and I think more if we look back simply by playing them incorrectly and getting what is important in what parts wrong.

To conclude, we need to look to the market forces driving each phase to predict it’s movement.

1. Pre-Earnings Sentiment is driven by the market and retail. We can use tools like stock twits and our own two eyes (to look at the chart) to find the direction and play it knowing we intend to cut before the release.
2. Earnings Release is driven by algo trading in the larger part. We can use tools like earnings whispers and other forms of DD to gauge where the company might stand when it comes specifically to EPS, Revenue & Guidance with the latter part requiring a degree of fundamental analysis.
3. Post Earnings Aftermath is driven by institutions making decisions based on the grand scheme and the market. The previous phases don’t matter at all here, all that matters is how the market is going to receive the news. RH JUMPED almost $100 in value and has come crashing back down because the underlying fundamentals just aren’t there. This is an extremely profitable phase that we should be focusing on more, because it’s only in this phase that we have all the information we need to trade effectively.

I think if we work more on pushing the community to play the phases independently and stop getting so emotionally attached to the second phase, we’ll all be much better off (and wealthier) for it.

[khalidad]

This is all really good stuff. I didn’t trade of these but cheered all of you on from the sidelines. I am wondering if it is possible, if you have JB style execution to get inside the move on immediate release of earnings. When a direction is pushed by the algos it should continue to sustain up until the earnings call happens. Could be some good longs or shorts done with stock only if you can trade after hours. Thoughts?

[Josh]

I’m liking Post earnings play. Collectively gather all the info and listen to the earnings call, come up with a consensus, then take a longer position the next morning.

[HotPocketChris]

the third phase you highlight is great. we never really played post earnings phase and it can be a great opportunity to make money. we definitely need to do that more.

[Conqueror]

Yeah, there are a lot of regrets on not doing this more. We’ve always left the calls with the correct guess. Gotta play to your strengths.

[Navi]

I agree with all this sentiment on the lessons learned from these ER plays.

I agree that the most money (and take this statement with the consideration that making money requires you to be right) to be made is before and after the actual earnings call.

Pre-earnings call moves:
It’s very important we have some better understanding and guidance for our own decisions based off previous ER, companies in their markets recent ER’s and recent analyst sentiment. That will play a big factor in determining where the market is likely going to move approaching earnings. We saw a heavy split and indecisiveness with ZM heading into earnings. Even tho it had crazy PT’s from the buys of certain analysts it was moving into unknown territory where we began to see a split of buys and holds. RH on the other hand had a majority of buys from analysts. We may have very well seen a similar peak of RH in regards to when ZM hit its $500 levels. But we should have played the calls into earnings since the stock had dropped due to spy and there weren’t any real signs of bad news for RH just yet. That’s hindsight and a bit of emotional teasing that is a good lesson for everyone.

Earnings:
Getting into how to accurately estimate these earnings results is going to be something that I do like less and less. You can have some crazy gains and also crazy losses. I think if we don’t have some concrete facts to run into the call with we’re likely playing blind and that’s not how you want to go into any trade. But if the pre-earnings movement is played correctly you can have a free position with profits on the side. So this part of the trade will get better as we get better.

Post Earnings:
It could be a long bleed for RH now as the institutional investors slowly reduce position in RH as they continue to flounder. This will take a while and not be an immediate dump as they are still posting good numbers that investors like to see. But the signs of them slowing that growth is something they tried to hide alongside some massive capital expenditures they’re under going to show they’ve “capitalized” on their increased revenues and to show good return on investment numbers. This could blow up in their face as moving into international markets is always a huge toss up (especially with products like furniture where taste, style, and material procurement can become a huge issue alongside manufacturing and logistics). I’m very bearish on RH long term now considering how they’re handling their tailwinds. But this is a good example of us having ideas or sentiment on where a company is and then having it reaffirmed. As we develop better coverage and time as a community we’re undoubtedly going to become a more efficient team in working on high risk high reward plays like this. I’ve loved my time here with you all and the expensive lessons I’ve got to share with you all has been worth every penny.

If you lost on any of these recent earnings plays I hope it’s not a drastic amount and always suggest taking a mental health break if you need to. Revenge taking digs the hole deeper and ruins the confidence in your decision making and judgement. Don’t be afraid to walk away for a bit and especially give yourself a break in big wins and loses. With both it’s important to remain in that same logical and emotionless state where you sent attached to a play but are rather playing the game. That’s all it is at the end of the day: you’re playing against yourself, not the market, not a company, yourself. So take care of yourself and have a wonderful weekend everyone! Love y’all

[Alpha01]

Appreciate the RCA being done on this. I think one of the primary challenges of the earnings plays has been that the thesis has been correct, but we’ve been inefficient in the play strategy. You’ve always cautioned about cutting the option before the call and feeling good about the gains from IV run-up; however, I think more than a few of us have gotten too reliant on the lotto-style plays where we rely too heavily on guessing the sentiment and wishfully thinking for a PTON-level price move. I love this enlightened strategy where we can be more cognizant of the pre-earnings sentiment and then ride the post-earnings momentum.

[macromicrodick]

i think one thing that i have trouble predicting, but should be factored in, is how tied into SPY all these phases are. i’m definitely not qualified to speak on it but is it possible to create a SPY variable and show how it boosts the effect of calls/puts if going in the same direction? i don’t mean crystal ball it but have some hedge where if we see a potential dump in SPY we can anticipate its effect on the trade?

i see SPY having the least effect on the post-ER because, like you said, we can take further out expiries and help ride out SPY waves while watching the DD manifest. just my 2 cents

[SuckyMayor]

I actually think the win rate is good on the servers DD, but to your point assuming the sentiment will carry through all three phases may be shortsighted. Earnings are a significant, regularly occurring catalyst that should be good for potential plays. I like the idea of breaking this into three phases.

I think we could be better about diversifying these types of plays as well. Its not terrible but many of us do flock to a select few tickers without exploring others. Yesterday we had no DD on ORCL because everyone was focused on LULU and CHWY. The day before we had no DD on CURV because everyone was focused on RH. I would also encourage everyone to try writing your own DDs as well as contributing to others if you notice a gap in the earnings calendar.

[DakkJaniels]

One other problem is picking entries. People that entered puts on Monday were in bad shape because the market was down on Monday, but then came back up on Tuesday. Granted there is no way of knowing what was going to happen on Tuesday, but it’s probably just best to just wait it out during these bigger market moves so that the options don’t get too far out of position to become (almost) worthless by the earnings call.

[Blooregard]

One thing I’d like to start looking at as well is option flows in the last 15 minutes of market before earnings to capture insider trading. We saw some extremely bullish options flows for RH in the last 10 minutes along with some very bearish ones for CHWY and we all know how those turned out.

I’m going to look into compiling some data on how these are correlated to earnings results, but this may need to be for earnings plays going forward unless I can find a way to dig up hiistorical options flow data.

[macromicrodick]

Also, just to add to post-ER plays, the conference call is such a crucial determinant in how we can assess the post-ER play evolving.

For ZM, thank god for that analyst to grill the CEO about guidance and then for them to totally choke. For RH, great to hear Conq et al call out the doucheiness of the CEO and how he was evading all the questions about guidance.

I’m all for analyzing financial statements, a skill that I’m brushing up on, but where we can distinguish ourselves from the algos, and thus make more money, is to size-up the people behind the numbers. i feel like a lot of people here have good bullshit detectors and know when someone’s trying to play them. maybe if we can have volunteers that can cover conference calls we’re following and then provide impressions or notes? Conq in VC covering conference calls is what i would have in mind where it’s really just a brief summary and reaction to key parts?

where it becomes more profitable for us is determining that the algos have overreacted to the top and bottom line numbers, so that they inflate the share price, but on conference calls we can deciminate that there is a shit to still wrong with the company and we can exploit this inefficiency (Kyrptek would be proud) by slamming puts.

[PaperhandsJB]

I am going to unarchive this as it is great info on earnings and add a new thoughts on playing post earnings. I love to play pre and post earnings and not gamble overnight on them. Has anyone in our server noticed a difference in what earnings time you play i.e. Earnings released after-hours vs earnings released pre-market? My thought/theory is that maybe it is safer or more profitable to play earnings that are released in pre-market because the market has less time to review the news, call, and data. Maybe it ran high at market close and into the evening and that may reduce the amount it keeps pushing overnight and into the morning. Most earnings are released what, around 6am to 7:30am, giving the market a few hours until open. If SPY is trending well or market in general, they beat EPS, Sales, and Guidance then calls right at open or within 10 min could go well. If earnings are bad then puts vs calls. If you see a divergence from SPY then you really know the earnings is pushing it making it even more of a safe play because it doesn’t give a shit what the market is doing. Just a theory and I want to start watching and testing this. Could use others input. TL:DR are earnings that released pre market easier to play direction that earnings released after hours?

[jjcox82]

I like this thinking. I sometimes when I remember look for premarket earnings that beat EPS or have decently successful reports. But for whatever reason drop at intial announcement but then are trending back up as approach market open. DKS is one of my biggest returns this year and only traded it one time. But is an example of this theory working.

Obviously the market on this particular day helped too I’d imagine

[PaperhandsJB]

Yea that was going to be my question. Compare it to SPY or Nasdaq etc and see if it trended just like it.

[The_Ni]

Two wrong calls so far:

• CVNA is up AH, even though earnings look bad. Had short-dated lotto-like puts. Only explanation I can think of is results were not as bad as market was expecting - the stock has been beat down a lot lately.
• DASH is also up AH, and this one deserves it. Also had short-dated lotto-ish puts. Was banking on folks tightening their belts and using less of Dash’s services, but I guess convenience can’t be beat.

Don’t have any other positions.

[PaperhandsJB]

Another example of great after earnings plays. I missed it but I was watching SE on bad earnings but too busy with WMT and BBBY. was watching 86 support from pre market and they said they suspended guidance this am. This was the better play. now at 78. 86 and 84 was support and it fell through both. SPY probably helped but again looking for earning plays will help this server more and post to forums. 4 out of the 5 plays this last week has paid 30% to 50% but market conditions have to somewhat fit too. Today we saw WMT push up holding 50 EMA when SPY was dropping.

[jjcox82]

Circling back on premarket earnings that seemingly get wrong initial reaction. I decided to test thesis on HD today. Premarket down 2 percent EPS beat. Coupled with TGT and WMT momentum really looked like good setup to rise.

Got a fill of just 1 320c. For half of what I had as my limit buy set at. I have a theory here that people that bought lottos yesterday and don’t see premarket movement they’d need just punt at open to salvage anything they can.

This was worth a bit more earlier but missed my opportunity so locked in when I could.

Also wanted to post this to second what JB was alerting that there are safer more thought out plays other than just BBBY that can be big ones. Will continue to watch for these and test them with small orders.