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An effective Earnings Setup for next time

A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

With Earnings Season coming up in the next month or so, I wanted to cover a simple, consistent setup that I use to identify potential earnings trade setups.

So for this edition of Tuesday Trade, here’s an earnings trade on TMobile (TMUS)…

To start off identifying a potential setup, there’s a great question to ask yourself: Do you think this is a ‘hot’ industry group right now? Is there any reason why in this quarter this ticker would do better?

For TMobile… the answer this last quarter, was yes.

For this time — while we’re all stuck in quarantine, phone companies have made a point to address how people have been using their phones more frequently. Because after all, everyone’s trapped in their homes. So there’s a macro reason to get long.

Now point 2.

I like to use the earnings analysis indicator to go back and see how it’s traded on earnings the past 8 quarters. Check out this screenshot of what TMobile’s past 8 quarters have looked like:

You can see above all those green blurbs right?

That means it’s traded higher after earnings. So probability wise, it’s more than likely going to go higher. With my analysis, I was able to go forward with actually placing the trade.

Put the trade into action:

Looking at TMobile what I ended up doing was I sold a put credit spread on it. Prior to earnings this ticker had a pretty high IV. So I sold an at the money put credit spread — an 87, 85 put credit spared which was sold for $0.97. It was effective too, because it expired worthless, so I automatically made a dollar overnight.

TMobile ended up trading from about $87 and gapped up about $6, and ended up being about 8% higher near the end. This is a good way to get into a trade if you’re bullish, and you can see what it looks like when it gaps up. This was just a quick win overnight with an earnings strategy. I risked $2 and made $2; 1:1 risk to reward ratio which is ideal.

5 thoughts on “An effective Earnings Setup for next time”

  1. Hi Danielle,
    What if the trade had gaped down? What is your process to not get the stock put to you and protect yourself? Do you set automatic order to buy back short leg at market price when stock hits 1 penny below strike?

    Nice trade!
    Jim

    Reply
  2. Danielle – do you use CML Trade Machine? It’s the best tool I know to analyse pre-earnings momentum for the most efficient and effective strategy.
    Henry and Ophir recently provided an excellent webinar on the tool.

    Reply

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