Yesterday afternoon I decided to buy GMCR puts ahead of earnings. I bought the 60 weekly puts for $0.12. I sold them today for $6.00 even. That is a 5000% profit. I have not played many earnings this season because I wanted to better manage my risk but the risk/reward on this play looked very attractive. There are a few lessons that this successful trade taught me.
Trend is your friend: This is a fairly easy one to remember, but it is much easier to go with the trend than to go against it. GMCR was trending down for months going into this report, so technically, it was set up for more downside. In addition, there was a weekly doji candle, which also signaled more downside. In the beginning of the week, I was actually bullish on the name, but as I looked more closely at the chart and analyst commentary, I flipped sides.
Understand market atmosphere: Right now the biggest worry for the market is forward guidance. Most names that have rallied/sold-off have done so because of their guidance.
For example, TSLA beat on earnings yesterday but their guidance was poor and therefore sold off. AAPL beat on their earnings but their guidance was below estimates and they sold off.
Going into the GMCR report, a lot of analysts had expressed their worries over guidance. I figured that given the exaggerated moves we have seen this earning season, a guidance miss would result in a huge move down.
Play earnings that not many people are focused on: I feel as though whenever a name gets a lot of hype going into a report it usually does less than the expected move. That is why I do not play AAPL earnings anymore because it seems for the most part AAPL moves 4-5% and that is all. No way to make money, not even premium selling (because it moves the full implied move).
The big moves have happened when no one expected them. GOOGL rocketed higher by over $100; I don’t think a person out there expected that kind of move, and most people like myself were probably expecting the typical 3-4% move. However look at FB. People were buying 5, 10, 15% OTM calls and the stock was practically flat post earnings.
GMCR was not a hot topic going into earnings. I didn’t see many tweets about it, and the option volume was relatively light (although there were more puts than calls bought). The implied move was not that much and for a stock that has many times moved 10-15% the puts were a bargain. I surely will not be playing GMCR next quarter because I know the premiums are going to be sky-high, because every one will be expecting them to have a big move. Similarly, I will not play GOOGL or AMZN next quarter because I expect that they too will have premiums that are way too expensive, in my opinion.
I think that these lessons can apply to all aspects of the market this year, not just earnings. The market has done the least expected things for much of the year. This ranges from having a number of false breakouts and breakdowns, to AAPL breaking-down from a 5-month rectangular box formation despite every analyst being bullish on the name.
This earnings season is pretty much done, so going into next earning season, I plan on finding names where I think the implied move will be way too cheap and names that don’t have much media attention.