Earnings Season Strategies
Banks begin the reporting this week, and I am still holding my long-term position in C (Citigroup) and will continue to do so into the 80s. Some notable companies reporting next week include JPM (JPMorgan Chase), WFC (Wells Fargo), BAC (Bank of America), GS (Goldman Sachs), TSM (Taiwan Semiconductor Manufacturing Company), and UNH (UnitedHealth Group).
How I Prepare for Earnings Season:
I look at their historical data. I use Market Chameleon to compile a list of positive occurrences (meaning the stock is up from a particular date) which ends up looking like the image below. If you see 75% this means the stock is up 75 percent of the time from that particular date.
I share access with anyone who wants this excel sheet. This image comes from the “All Plays” tab on the link above.
I have made many YouTube videos explaining my earnings strategies and covering this document. For a more detailed explanation of what I look for to make a play, please watch this video. Also, be aware that this data only measures the last 12 quarterly earnings reports.
The way I play earnings are:
1. Run up
a. O-S in the Excel sheet shows run-up stats on positive occurrences. Positive occurrences mean the stock went up. O is 2 weeks before, P is 1 week before, Q is 3 days before, R is 2 days before, and S is 1 day before. This helps identify which companies have a high historical probability of running up into earnings. For example, JBHT has a 92% positive occurrence in column P, meaning JBHT is higher on the day of earnings than it was 1 week before 92% of the time. It also has 75% on column Q, making it a potential candidate for a run-up play.
2. After
a. W-AA are the after earnings stats. W is 1 day after earnings, X is 2 days, Y is 3 days, Z is 1 week, and AA is 2 weeks. I like 75% or above, like those for WFC in the above image.
3. Through
a. This is when I hold through the earnings, especially with long-term stocks or those with recent overreactions. UNH is an example due to its recent overreaction. I also sell to open options through earnings on my long-term holdings. I find the range based on average and implied move, then sell to open covered calls and cash-secured puts. Alternatively, I might sell a straddle if I believe the implied move is significantly larger than the actual expected move. I NEVER hold short-dated options through earnings; this is generally a losing strategy. Instead, I am always the seller of shorter-term options.
4. Day of
a. T, U, and V give us day of earnings stats. T shows the earnings move (from the close before earnings day to the close on earnings day), U shows the opening gap percentage (the amount the stock moves from the close before the earnings report to what the stock opens on day of earnings), and V shows the drift percentage (If the stock goes up or down from open on the day of earnings).
b. I manually enter the open price of the stock (in this hypothetical we are using AAPL) to find the range for the drift play. If AAPL opened at $240 then the drift ranges are seen below, $246.72 to $237.60.
For day of earnings, I focus on companies with a high positive drift rate. For instance, AAPL has a 75% positive drift rate (as seen in column V in the image below), suggesting a potential play if the earnings are decent but the market reacts negatively.
The Excel sheet also includes columns AC, AD, AE, and AF for the day of plays. All these percentages represent day of earnings moves.
AC is the average overall move.
AD is the average overall gap.
AE is the average from open to high.
AF is the average from open to low.
Example with AAPL:
If AAPL closed at $236.85 the day before earnings and opens at $240:
The implied move (column AB) gives a range from $249.33 to $224.37.
The average move (AC) suggests a range of $245.14 to $228.56.
The average gap (AD) points to a range of $243.24 to $230.46.
All of this information is transferred over to the “home” tab of the excel sheet and looks like the image below.
Using these levels, I look for volume profile to pinpoint support and resistance for trading decisions.
The 1.5X Play:
This is an after-play where I look for the price to exceed the implied move by 1.5 times (column AB). For AAPL, this would be above $255.57 or below $218.13. I use this strategy mainly for squeezing market makers on the long side, rarely short, as significant moves usually accompany good news, leading to buying pressure from market makers hedging their positions.
Earnings season is not just a period of heightened volatility; it's an opportunity ripe with potential for those who understand how to navigate it. By leveraging historical data, understanding market reactions, and employing strategic plays like run-ups, through-holds, day-of reactions, and the 1.5X play, you can position yourself advantageously. The tools and strategies I've shared, from using Market Chameleon for data analysis to implementing volume profile and zone theory for precise entry and exit points, are designed to help you make informed decisions.
Remember, while this guide provides a structured approach, the market's unpredictability means there's always an element of risk; however, with diligent preparation and a clear strategy, you're better equipped to capitalize on market movements. Dip buying, sizing down, and adjusting your zones during earnings season are part of managing that risk effectively.
I encourage you to dive deeper by watching my YouTube videos where I explain these strategies in more detail. Earnings season is where significant wealth can be made or lost, but with the right knowledge and approach, it's where you can thrive. Here's to another successful earnings season. Let's profit together!