I’ve been a big earnings trader for a long time. Everyone says “oh earnings, it’s just a crapshoot!” Well, yes and no. My 3rd Quarter track record was 74.4% wins with 5-digit net gains on earnings trades. I backed off on doing a lot of earnings in Q4 just because I needed a rest. Earnings, done right, is hard work. You are up at 4am to watch reports, you don’t stop working until after 6pm. But I’m now rested up and ready to do some earnings trades into the end of the year. I thought I’d share my process here before showing you my ADSK trade. I do this on every earnings setup as my analysis design process:
1. I begin by looking at historical standard deviation moves and comparing them to what market makers are pricing in. This is “real math” standard deviations, not the “standard deviations” that some people like to toss out. I pay particular attention to black swan events in the last 2 years.
2. Then I look at average % moves over the last year
3. Then I look at the MM expected move
4. I note the expected report results for eps/whisper/revenue
5. I look back in my trade journal to see how I traded previous quarters and how it worked out
6. I do an extensive technical chart analysis
7. I use the CMLViz backtester to see what trades have historically worked for earnings (i.e. it will show if 30 delta naked puts have a 100% historical win rate for the 1 day of an earnings trade).
8. I subscribe to “Trade Alert” which shows where “smart money” (large funds) is placing their earnings bets. So I do a sentiment and options chain analysis going back a week.
9. Then I’ll begin design work. Some stocks tend to have a mini vol crush before the close (before report), so I’ll put those trades on earlier. Stocks where vol stays bid before the close I’ll wait later in the day for opening trades. My style is to be much less directional and more about wide profit ranges. Naked calls don’t bother me when I know I’ll be able to buy stock after hours. I never seem to be able to short stock after hours, there’s never any to borrow. I size everything for my risk tolerance.
I’ve got an ADSK design I’m working up that I’ll report on when filled. I’m looking at a #PutRatio coupled with a #CallDiagonal. There is a lot of bearish sentiment by funds in ADSK this week, which is surprising given the strength of the chart–but clearly holders are nervous going into this report.