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How to Prepare for Earnings Season

Like cooking a pizza on a grill, investing during earnings season requires a lot of preparation. Research helps; and so does options trading.

Earnings season officially kicked off last week when JP Morgan (JPM), Wells Fargo (WFC) and Citigroup (C) reported. Though all three bank stocks fell following their announcements, none of the drops were disasters. That said, I can promise you that there will be blowups this earnings season. There ALWAYS are!

And no matter how much research and chart reading you do to prepare, if you hold enough stocks, it’s nearly impossible to avoid an earnings landmine at some point during earnings season.

Earnings Season and Pizza

I can be a bit obsessive about research when it comes to earnings season, options trading and virtually anything in my life. For example, I recently became somewhat obsessed with researching how to cook on my new Big Green Egg. After barbecuing on a Weber gas grill for the past 20 years, my wife surprised me for my 40th birthday with a new ceramic kamado-style charcoal grill (hmmmm, perhaps she was trying to tell me something about the caliber of my past BBQ).


And since I always want to be as prepared as possible, over the past two weeks, I’ve read two cookbooks and countless online articles on the skills needed to cook properly on the Egg. And yet, even after all that preparation, my first pulled pork took five hours longer than anticipated, and my first effort at pizza was a mess.

These two photos document my pizza disaster:


If you don't prepare for earnings season, this is the pizza version of what your portfolio could look like.

Clearly, my first attempt at pizza was a failure (though in fairness, it tasted much better than it looked!)

So how do I prepare for earnings? I research like crazy! Every day during earnings season, I send Cabot Options Traders/Cabot Options Trader Pro subscribers my research, and what the options market is forecasting for companies reporting that night and the next morning.

For example, every earnings report I send to my subscribers describes what the options market is predicting in terms of price movement, summarizes previous earnings moves, describes how hedge funds are positioning for earnings and presents my thoughts on all of it.

Here are excerpts from the earnings write-ups I sent to subscribers on Monday ahead of Bank of America (BAC) and Netflix (NFLX) earnings:

Bank of America (BAC) earnings 7/18 before the open

With the stock trading at 24, the options market is pricing in a move of $0.70, or 23.3 to the downside and 24.7 to the upside.

Last earnings cycle, BAC was virtually unchanged on earnings.

Volatility seems expensive, in-line with previous earnings cycles.

Skew is pricing in little downside or upside fear.

Open interest is skewed bullish on a 1.4:1 ratio call over put.

BAC is one of the top five stocks that I watch with the most consistent call buying. Day after day, traders buy upside calls and sell downside puts. The call buying is because the price of calls is so cheap. And while puts are cheap, traders sell anyway, as they are likely willing to buy the stock at lower levels.

The most targeted of the call buys are the July 24 Calls (215,000 in open interest), July 25 Calls (143,000 in open interest), September 24 Calls (100,000 in open interest), January 25 Calls (185,000 in open interest), and January 27 Calls (200,000 in open interest).

Netflix (NFLX) earnings 7/17 after the close

With the stock trading at 162, the options market is pricing in a move of $13, or 149 to the downside and 175 to the upside.

Last earnings cycle, NFLX fell from 147 to 143 on earnings.

Volatility seems very expensive, in line with previous earnings cycles.

Skew is pricing in typical downside fears with a bit of upside interest.

Open interest is skewed bearish on a 1.3:1 ratio put over call.

Option order flow has been relatively mixed in NFLX for quite some time.

In the last two weeks, a trader has bought approximately 5,000 December 160 Calls for $12.60.

The last two earnings moves were relatively muted, with a loss of 2.7% last quarter, and a gain of 4% the quarter before that. That lack of movement is in stark contrast to a gain of 19% in October 2016, and a 13% loss in July and April of 2016.

Big Earnings Week on Tap

In the days to come, I’ll send my subscribers earnings write-ups on Microsoft (MSFT), Visa (V) and General Electric (GE), which are all reporting later this week. And in the weeks to come, I will write up much larger reports on stocks that Cabot Growth Investor and Cabot Stock of the Week subscribers hold positions in, such as Facebook (FB), Tesla (TSLA), Alibaba (BABA) and many readers’ favorite, Apple (AAPL). My write-ups will include earnings trade ideas and ways to hedge long stock positions.

And if one of your stocks (or a stock you’re waiting to buy) blows up this earnings season, keep in mind my “Three Day Rule” on the old trading floor rule that warns about buying immediately after an earnings miss. Here’s a link to a piece I wrote on The Three Day Rule.

Big picture, my takeaway for earnings season is like my overall plan for trading. Work and research hard, execute trades you believe in, and over time, the many winners will far outweigh the occasional earnings blowup.


Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.