Active-Trader - Post Earnings Resolution

Welcome back Active Traders and Wealth Builders.

This past week was a pretty good one all things considered.  The week started out with upside continuation in AAPL and I was positioned to take advantage of that as described in last week's post Lemons into Lemonade.

This past week was also notable because of the abundance of quarterly earnings reports.  The outcome of earnings reports can be thought of as binary events one of 2 potential outcomes as follows:

1) Stock stays within the expected "Market Maker Move"

This outcome occurs about 80% of the time and I position for these ahead of earnings by selling call spreads above the expected move and put spreads below the expected move.   For more detail on this technique, see my prior posts here and here.  Recall I will take these trades only if I can take in more than 30% of the width of the spread as a credit.

2) Stock exceeds expectations to the upside or downside and blows through the expected move and becomes a continuation candidate.

You will know this outcome is a reality when one side of the spread you put on ahead of earnings goes max in the money against you.  Sometimes its tricky to tell when this is going to happen since the stock with often come up and threaten your short strike (but never exceed it) then pull back.  Other times the stock will come up and blow through your short strike then pull back.  What happens next is key - does the Market Maker Move level become a new point of support (for further upside) or resistance (for further downside)?  The price behavior is a key tell.  Let's look at a few examples.

Starting the week on Monday, for Herbalife (HLF),  I sold the 53/55 62/64 condor for a credit of 0.75 and a max loss of 1.25.  After briefly threatening the 55 strike on the downside, the selling turned out to be overdone and the stock rallied off the bottom and eventually threatened my short strike on the call side only only to back off and close in the middle of the range.  This trade went to max profit and I didn't even need a closing order which is ideal. The short strikes are shown in the chart as red horizontal lines, and the long strikes are shown in green.

Twitter was our next candidate that came along on Tuesday.  I sold the 36/38 49/51 condor for a credit of 0.75, max loss $1.25.  Again the stock sold off hard after earnings, but rallied off the lows and closed well within my short strikes.  On Friday, the stock sold off and started to threaten my short strike to the downside so I bought back the short 38 put for a debit of 0.05 which is a commission free trade on Thinkorswim. As it turns out I would have been fine doing nothing.

On Wednesday, I sold the Mastercard (MA) 69/71 75/55 condor for a credit of 0.65 which was just under my target of 30% of the width of the strikes. This one ended at full profit with no closing transaction required.

Also on Wednesday, I did Yelp 50/52.5 65/67.5 condor for a credit of $1.20 which is a very good credit for a 2.5 wide strike.  This one got the better of me as follows.  Yelp violated my short strike, so the closed the 65/67.5 for a debit of 0.90 (having sold it for 0.55).  Then to pile on (and figuring it would break out, I sold the 63/65 PCS for a credit of 0.70, then eventually had to buy it back at 1.35 when YELP rolled over later in the week.  So all told, I lost about 1.05 on this deal which is good loss control on an otherwise fiasco of a trade.

On Thursday, I did WYNN 195/197.5 217.5/220 condor for a credit of 1.0 even.  This one started out okay, but as the news came out, it got increasingly bullish.  Note how once the short strike was violated, it was no longer a line of resistance, it became a line of support.  I closed this one out at a debit of 1.35 which was a good thing to do since had I done nothing, it would have come to a max loss of the full width of the spread which is 2.5.  So overall, only lost 0.35 on this trade which is good loss control.

Our lemons to lemonade strategy would be go to out long shares of WYNN expecting further upside continuation post earnings.  But I already had a good decent size position in Lasvegas Sands LVS.

As for up and coming stocks, I have a good position and a small profit in RF Micro Devices (RFMD). This is not a new all-time high, but its a 3+ year high. All time high in the shares was set at 92.25 back at the very top of the dot-bomb bust on 1/31/2000.  In fact I think I traded RFMD back in the day which is why it peaked my interest.  Based on that old top, RDMD is going to need a long climb back to a new all-time high.

Finally, I went out short a few shares in LNKD has shown on the top chart.  LNKD had earnings, and they did not overwhelm.  At a PE of 714, this stock has a long way to go to the downside before its at a easonable valuation.

Have a great week ahead and good trading.