Earnings Plays and Data Services

From Our July 2015 E-mail Archives: At the time of this post, the markets are in the thick of Q2 2015 earnings announcements. Last week, we received a question from one of our traders about earnings and data services. Our Head Trader, Robb, answered the question.*


-----Original Message-----

From: Jay P.
Subject: Earnings Plays - Data Services?

Good evening,

I wonder if there are any recommended data services (whispernumber.com, earningswhisper.com, stocksearning.com, etc.) to support playing earning trades (ratio backspreads, straddles/strangles, verticals, etc.).

Any insights appreciated.

Thanks.
Jay


-----Reply Message-----

Hi Jay,

I used to be a news hound and would search all over for news, reports and commentary. I actually used to listen to conference calls as well after earnings reports. In the end, I realized that no matter what research I did or commentary I studied, the stock ended up doing exactly what it would have if I hadn't done any of that research.

In fact, I finally realized that all of the research that I did actually "convinced" me that it was going to go up or down. This caused me to stay in losing trades too long since I was "convinced" from my research. So, now I don't do any research other than plan out my entry point, risk parameters and exit points.

The options premiums will tell you the expected movement up or down. You can do this by looking at the front month at-the-money (ATM) straddle and make your decision to play a short volatility or long volatility play. Or, you can choose to lean bullish or bearish with a ratio backspread. All of this will be based on risk/reward analysis and not on the "news" of the stock or what the analysts think is going to happen.

In this way, you are no longer playing your hunch, guess or "well researched opinion." Rather, you are now playing odds and placing yourself in positions where the losses are minimal when you are wrong and the wins are big when you are right.

Over 1,000 times that you make an earnings trade, the move of the stock will be random in the end. So, it really comes down to putting yourself in positions where the risk is less than the reward.

Hope this helps.

Thanks,
Robb

* NOTE: Some original wording has been modified for legibility.

End Of Day Post

The markets opened lower today, but reclaimed their losses, closing flat on the session. The markets have been experiencing a bounce off of support over the last couple of days. Today’s session could have gone either way after yesterday's FOMC statement, but it appears the bulls had an answer to this morning’s weakness.

Technically, today's action doesn't change much in the overall market patterns, however the bulls did show up, leaving us with a nice hammer candle in the S&P. Tomorrow, we will be looking to see how this week finishes, although either direction should give us opportunity for new trades based on earnings results.

Mid-Week Outlook

• Bullish: 34%
• Sideways: 43%
• Bearish: 23%

Have a great weekend,

The Maverick Trading Team

MAT: Highlighted Trade From One Of Our Traders

Here is a great trade made in Mattel (MAT), which designs, manufactures, and markets a range of toy products worldwide. There are a few indicators in this chart – not just the support level breakdown – which helped to confirm this move lower. Using multiple indicators is just one of many topics covered in Maverick's curriculum.

There are many different trading strategies available to take advantage of this type of setup in the options world. In this case, our trader's personal Trading Plan directed the trader to buy a diagonal put spread, giving the position added time for continued weakness in the stock and further gains.

Typically, for the strategy chosen, the risk is the premium paid and our traders aim for a 50%+ return. At Maverick Trading, we pride ourselves on our community of traders. Every week in our live Trading Room, our traders share their favorite new trade setups (like the one above from last week) with all of their fellow Maverick traders.

NOTE: Chart(s) courtesy of FINVIZ.com.

End Of Day Post

The bulls finally made an appearance today following five straight days of selling. All three majors made decent moves to the upside, with the S&P posting the largest gain of just under 1.25%. We would expect a counter move after five straight days in either direction...now we just need to see how far this move will go.

We are once again seeing different levels in the three majors. The Nasdaq is still the strongest of the three, pulling back to its rising 20-day simple moving average (SMA) and posting a nice hammer candle. The S&P has given up more, moving below its 50-day SMA, but bouncing off of its rising 200-day SMA – still an overall bullish sign. The INDU looks to be struggling here – below its 200-day SMA and setting a lower low.

Earnings season is still the main driver to these markets. We should now look to the sectors with the strongest results. It is still early, but today's move could create opportunities to the upside...or at least trigger some bullish setups. Feel free to start adding to your portfolio if desired. Make sure to implement both longer- and shorter-term trades, thus making it easier to adjust your exposure based on any changes in market sentiment.

Have a great night,

The Maverick Trading Team

Repurchase Programs and Stock Price

From Our November 2014 E-mail Archives: One of our traders wondered if there was a trading strategy that could be used on companies that had significant share repurchase programs. Our Head Trader, Robb Reinhold, answered the question.*


-----Original Message-----

From: David B.
Subject: Buyback Question

Hi Robb and Joe,

I was just wondering if either of you have ever done any research on companies that have announced or have large stock repurchase authorizations in place and the impact on their stock price?

Obviously, companies have blackout periods (e.g., before earnings) when they cannot buy back stock. However, I would imagine that these authorizations could provide some support for the stock price. Therefore, after earnings, these companies are likely to trade sideways or have an upward bias.

If the stock trades in this manner, then it would appear to me that they could be good candidates for slightly out of the money credit spreads or diagonals. I hear you guys talk a lot about finding stocks that are not going to go down and, to me, these could fit.

Am I wrong in my rationale? Do you have any thoughts or experiences?

Thanks,
David


-----Reply Message-----

Hi David,

Thanks for the question – this is an interesting one. The big problem about buybacks is that even though the company can announce a 1 billion dollar buyback, they don’t actually have to do anything. So, there is no way to know in real-time how much the company is trying to buy back at the moment. Most companies do report their buyback amount per quarter with earnings, but that is not required.

Overall, companies that are actively buying back stock after buyback announcements tend to move higher. I don’t have any hard data (it might be out there on Google), but I did pull up a quick story from The Economist – click here to read the story.

I skimmed through the article and didn’t see any hard data over a long period of time that would support our hypothesis that companies that are actively buying back their stock will increase/beat the market. However, in my 18 years in this business, I would say that there is a small benefit to a stock price from share buybacks. However, your question regarding repurchase programs and stock price is "cause and effect" and my favorite saying in statistics is, "Correlation does not equal causation!"

You could say that only companies that are generating a lot of free cash flow (FCF) from operations can afford to buy back their stock. It is PROVEN that companies that generate higher rates of FCF have stock prices that rise over time. As you can see, the buyback is likely just one piece of an overall bullish scenario. I think that you are looking in the right place, but the buyback is probably only a small part of the overall positive story.

Thanks,
Robb

* NOTE: Some original wording has been modified for legibility.

End Of Day Post

Earnings results are still rolling in, as the markets continues lower this week. We are seeing mixed results so far; however, the companies who come up light are weighing heavy on the markets. There are still a lot more announcements to come, and with a very light economic calendar this week, we should continue to see market reaction to the results.

Technically, we are still in a bull pull back here. Volume has been increasing with this move lower, so keep any eye on the VIX for confirmation of something more than just a pull back. Keep an eye on support as well. We could see the bulls step in at these levels, as we haven’t heard from them yet this week.

Consider keeping a balanced portfolio as we move through earnings season. We could see a directional bias reveal itself over the next couple of weeks.

Mid-Week Outlook

• Bullish: 13%
• Sideways: 46%
• Bearish: 41%

Have a great night,

The Maverick Trading Team

KITE: Highlighted Trade From One Of Our Traders

Here is a great trade made in Kite Pharma (KITE), a clinical-stage biopharmaceutical company. The Ascending Triangle chart pattern shown below can prove to be very strong and bullish. This pattern is just one of many covered in Maverick's curriculum.

There are many different trading strategies available to take advantage of this type of setup in the options world. In this case our trader’s personal Trading Plan directed her to buy a diagonal call spread, taking advantage of possible gains even after reaching a $75 dollar stock price target.

Typically, for the strategy chosen, the risk is the premium paid and our traders aim for a 50%+ return. At Maverick Trading, we pride ourselves on our community of traders. Every week in our live Trading Room, our traders share their favorite new trade setups (like the one above from last week) with all of their fellow Maverick traders.

NOTE: Chart(s) courtesy of FINVIZ.com.