By: Steve Smith
Earnings season is fastly approaching us and you can expect my first Earnings360 trades to be issued next week — when big banks such as JPM Morgan (JPM), Bank America (BAC), and Citigroup (C ) post their quarterly reports on Thursday.
We’ll be issuing Earnings360 trade recommendations the night before. so that you can capitalize on the unique money-making opportunities of these price catalyst moves and events
The sole focus of Earnings360’s on the price of options. Specifically, the Post Earnings Premium Crush (PEPC) that I discussed with a slew of eager listeners on today’s web call.
On that call, I took a deep dive into my process and approach to harnessing the power of PEPC to deliver consistent returns from earnings reports.
As discussed, even in ideal circumstances, earnings can be very tricky to trade with many moving and unknown parts involved. Three questions to ponder are: Will the company miss or beat expectations? What will be the guidance? Will traders ‘sell the news,’ or buy into the unknown, believing the recent decline has priced in a near-worst-case scenario?
However, PEPC is a reliable factor that we can predict with a high degree of confidence.
Take a look at Netflix’s (NFLX) implied volatility (gold line) vs. its realized volatility. Can you guess when the earnings reports were released?
This very simple but often-overlooked meaning of an option’s implied volatility is a powerful tool for producing consistent and predictable profits in what can otherwise seem as irrational earnings report responses.
I can’t tell you how many times a company delivered the triple play of ‘beat on revenue, beat on EPS, and raised guidance,’ only to be smashed with a sell on-the-news response.
While the Earnings360 option-centric approach isn’t a guarantee, it does stack the odds considerably more in our favor — by taking the guesswork out of the game.