Hey 5-Star Trader,
It’s a new week in the market and by now we made it through bank earnings reports for the previous quarter as well as most of tech earnings. To say it’s been volatile is an understatement and we have even more reports to come.
Even if you don’t trade the reports yourself, earnings results are very important for traders. We need pay attention because these reports can move markets in a big way. Right now, the indexes are hanging on, but I’m very wary of being long in this market because Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Amazon (AMZN) all did very well on earnings, but the indexes still faded very quickly after initial reactions.
Earnings Hot Zone
When it comes to analyzing earnings reports, I always look to my favorite earnings tool, the Earnings Hot Zone. This tool gives me critical stats that I need to trade pre-earnings, earnings and post-earnings moves. The data demonstrates how often the company beats and misses expectations, by how much and which direction they normally gap, and gives me targets for earnings moves, and more!
Companies left to report include 2U Inc (TWOU), MGM Resorts (MGM), O’Reilly Automotive (ORLY), Sonos (SONO), Uber (UBER), and more.
This week, I want to focus on Uber.
Uber – In the Hot Zone
This week, I wanted to highlight UBER (pictured below). I’m highlighting this ticker because especially due to the likely hype around it, it could present opportunities to trade it in the options market.
I use the Hot Zone to identify specific patterns throughout earnings season. Sometimes there aren’t any, but often the Hot Zone illuminates a distinct moment in time.
For example, take a look at the UBER earnings volatility metric (pictured above). Do you see how the implied volatility (IV) rank is as high as it’s ever been? It’s up at 100%! You can see on the oscillator that it has climbed higher throughout the duration of the Hot Zone, up until this report. That means that the options prices are at their highs, as options premium increases with an increase in IV.
Typically, when trading earnings, I love to sell high IV. New options traders can get tricked into thinking it is a good time to buy options, but unfortunately – the majority of the time – the price of those options get crushed after the earnings report. This is known as the “IV crush,” making the options worthless after the report.
The next consideration would be, if you’re going to sell premium, in which direction?
The Hot Zone is what gives me an edge. It tells me if a certain ticker typically moves to the upside, downside, or is more likely neutral.
In the UBER case, you can see from the data that the stock has a market maker expected move of $5.25. Yet, on average, it typically moves between flat and about $3 in either direction. The chart shows that moves have been about half and half, either up or down, telling me I don’t have a directional edge. That leaves a neutral trade as statistically my best option.
I’ll also note, based on the technical pattern and downtrend this stock has been in since March, I’m leaning toward more downside, despite stats saying neutral is better. The problem with these types of stocks is since everyone is likely expecting more downside action, if the stock does anything slightly better than expected, it could rally… hard.
Either way you slice it, I expect more volatility to come our way so stay nimble!
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