This post will serve as serious discussion for what plays may be viable for the challenge. Users are discouraged from posting positions updates or adding insight or asking questions in this thread, comments such as these will be deleted and if becomes a constant problem, I’ll lock this thread to only those with credibility roles.
I will be creating a separate Q&A post for things such as that. I will also be updating this thread more this evening, still just getting everything ready.
I’m going to be exploring playing the upcoming SHOP earnings using our earnings methods detailed in:
My initial earnings plays assessment
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:
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”.
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).
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.
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.
So looking at these plays individually, it’s clear what I got wrong about judging the earnings reactions. In the case of…
RP’s supplemental take on not holding through earnings
Everybody wants to catch that giant move in after hours on the ER of the day but there are invisible risks to this when you are holding options, that risk is IV crush. IV will increase as you head into earnings and will drop significantly once earnings has come out this is how options work. If you hold through after hours or pre market and through the announcement then you will be committing to losing a large amount of your positions value to IV crush.
Also something very commonly is that you will be right on the ER revenue and profit but will miss a news announcement or comment on the call that moves it in the other direction. It’s actually easy to predict if a stock will beat or miss estimates, what isn’t easy is predicting the reaction from the market before the ER has even dropped.
For example IBM put on a show today for why holding through after hours is dangerous. Let’s follow the 135 calls for the nearest expiration.
At close before ER the calls were at 2.60
At open after the ER the calls were at 1.11
The stock was actually green at open but the calls were down 60%
This was because of IV crush but it doesn’t end there. The IBM earnings was bullish it just took time for the market to fully adjust to that so at open I pointed it out and started to watch. IBM was red on the day after the first five minutes, it closed up 5.6%. It took time for the momentum to kick in but when you see an ER is looking like it went will but the stock price has yet to react that’s a buying opportunity.
IBM 135s got down to .45 cents at open and at the daily high were 3.62. If you bought before the ER you’d of made ok gains of 50% but if you bought at open and avoided the IV crush and choppy moves you’d of gotten hundreds of percentage gains.
There are times where holding through an ER is a good idea and that’s when you expect it to be a massive move. But on ERs that shouldn’t contain game changing news or are on blue chips and large caps that’s when you really need to avoid holding overnight.
As I type all this MSFT is having an ER and is up 1.8%, if it stays here this will just IV crush those calls so they are break even and I’d bet there’s a chance it ends up running tomorrow but not before giving a buy opportunity in the morning that would be a safer place then having held through the night before.
Basically, play the direction of the reaction to the ER once it’s out, don’t play in anticipation of the reaction to an unknown report. And avoid IV crush.
SuckyMayor’s earnings sentiment method
With RH behaving like a stupid overvalued piece of crap, missed opportunities on earnings plays, and earnings being an inscrutable mishmash of binary facts and emotional nonsense, I started digging into behaviors of tickers prior to after-hours earnings calls to try to identify measurable trends within tickers that may lend some insight into how a stock may move with earnings.
Namely I wanted to find out how we can avoid losses after astounding DD. How can so many people pour their minds into earnings theories but get trumped by either something stupid said in earnings call, misses on guidance, misses on goals, etc.?
I found interesting correlations, and cannot stress the following enough:
This is gambling, and arguably a stupid way to gamble.
This is the byproduct of frustration with earnings and nothing else.
Doing DD and looking for opportunities outside of earnings seems to still be more profitable than trying to guess earnings.
This is not financial advice, strategy advice, or anything similar. These are the musings of an idiot who likes shapes and patterns.
Insider information is unavoidable and will be used to inform trading practices regardless of its legality. We can gain enough insight by watching volumes prior to earnings to predict the outcome of the earnings call, however it requires quick decision making in the final 5 minutes of trading. An important warning is that while this seems predictable directionally, it does not seem to be an accurate gauge of velocity. I cannot estimate how much a stock will move with this method.
There is a very short period, oftentimes less than 15 minutes, prior to market close in which we may be able to discern which direction the stock will move after earnings. I have reviewed historical earnings data and found that this method is roughly 80% accurate. Generally, stocks that have higher volume have better showings in the final minutes of closing, so while the low volume stocks are more volatile, higher volumes may be a better target for this kind of strategy.
The timing is the trickiest part of this entire strategy. Last night I started watching 2 minute candles on Webull at 3:48PM EST. Between 3:48 and 3:56 a stock’s movement may reflect the movement it will make in the aftermarket, and could be a reflection of insider information informing stock movements right before market close.
And finally, the painful one.
The Blind Gamble
I was observing and mock calling which direction the stocks would move, and found that I was right at least 80% of the time. The problem with fake callouts when you have nothing on the line is confirmation bias. You will always find data to support your thesis until you put it into motion. So I picked three tickers with AH earnings last night and opened some positions at 3:57PM based on what I saw:
I did no TA, no DD on these…
Going to start looking into this tomorrow.
Getting more comfortable with the idea of trading on stream and getting the kinks worked out of the “alert system”. Going to start hitting this harder next week with “Radio Valhalla” focusing on analysis of forum DD intraday and scouting for good entries.