The Case of ETSY
Today’s issue is going to be similar to the case studies I’ve done in the past, but it’ll contain more of a macro view of the market.
I’m going to provide you with an in-depth overview of how I identify, and then trade, an earnings move on a Five Star name. Then once you’ve seen how I do it, you can take this new knowledge, and apply it to your own style of trading (maybe even trade this Five Star name alongside me).
The Five Star we’ll be looking at today…
ETSY — the online market-place that does something entirely different than Amazon, yet is equally appealing.
ETSY is the go-to spot for personalized birthday presents, anniversary gifts, wedding decor, children’s birthday parties, etc. The list goes on and on.
It was Henry Gambell that first pointed me towards the chart in ETSY, and we’ve been trading it in the trading room on a frequent basis, along with holding shares of stock in the name.
Why? Well, not only do we love the site and the products, but ETSY is all the rage with the Millennial generation.
Like we talked about in the Phoenix class, it’s critical to adjust your portfolio and be aware of generational shifts in spending. Look at what happened to Kraft last week… it dropped 26% on a bad earnings report.
Why?
Millennials (and many other groups) don’t really want to eat this type of over-processed food anymore. We can see that in the stock chart, along with the earnings reports. Ouch.
That brings me back to ETSY. This is one of our key stocks on both the Honey Badger Don’t Care list (stocks that move despite what the overall market is doing) and it’s on my Millennials Buy It list.
Why?
It has a beautiful, Five Star pattern, and has shown relative strength since the downturn in December.
Now, what to do with it?
Well, Henry was trading the daily squeeze going into the earnings report on this one, and was able to catch a nice move there.
I’m going to come in and trade the earnings report, along with the after-earnings move (if we get one).
Typically, when I have a Five Star stock, with a bit of high short interest (keep in mind, a lot of the shorts have been squeezed on this one), I like to sell at the money put credit spreads ahead of the earnings report.
Why? Implied volatility rises going into earnings. Selling premium is the best way to take advantage of that… when you’re right.
What DON’T I do, going into an earnings report?
Well, I typically never buy long calls. I’ve stated I’m bullish ETSY. Usually, that leads folks to state, “Okay, great. I’m going to buy some long calls.” I RARELY buy long calls before an earnings report.
Why?
Because, the implied volatility is so high, and it’s high because of the binary event — the earnings report. Usually this is paying up for something that won’t hold the high IV through the report.
Of course, we have to remember, trades on an earnings report are just that. They’re based on a binary event. Even though we’re bullish ETSY, and are trading it as such, it doesn’t mean that some piece of the report could be worse than expected and it may send the stock lower. (That doesn’t change my overall bullish view, in the long term.)
In that case, what would I do?
Well, as long as the pullback on earnings is within the expected move, that’s typically just another buying opportunity for me. The only time a pullback on earnings on a strong stock isn’t a buy for me, is when the stock gets completely crushed — like Kraft did on Friday.
What else am I looking for in ETSY?
If in fact we get a gap up tomorrow, that is 2x the market maker move, I may look to day trade it for a momentum trade.
Hi Danielle! I follow you on the TV channel and also in ‘Fivestar Trader’. I bought few March 15th, ETSY $55-60 call spreads @2.45 debit. How do you recommend me exiting these call spreads? your reply is greatly appreciated.
Hello there –
Nice to ‘meet’ you. As apart of my service, I walk through my own positions, and why I’m entering and exiting them. For ETSY, or any other trade, I usually exit using Fibonacci extension targets. I learned this work from Carolyn Boroden, the Fibonacci Queen. Generally, I look for a squeeze on entry, and exit at an extension. ETSY is different, because this is a 2x move trade. What is that? It’s when a stock makes 2 times the market maker expected move on earnings. These are generally momentum trades, with 4-6 days on average of upwards movement. For this type of after-earnings trade, I just use a trailing stop. Some run out of momentum after 1 day, some for 2 weeks. It’s really hard to say. Look at CYBR, LRCX, and XLNX for after earnings examples. Hope that helps –