The Stone-Cold Earnings Trade Lock of the Week is for those looking to add a little juice to their investing experience. By utilizing the options markets, returns can be spectacular. They can also be just as volatile to the downside.
My goal in publishing a Stone-Cold Earnings Lock of the Week is to help you make money and lots of it. That said, there are certain constraints of publishing to a wide audience, mainly that I’m not available to hold your hand to help you execute these trades. For the most part, you are on your own.
As such, I want to take some time this week to outline a basic rule that I suggest you follow if you are interested in playing the Stone-Cold Earnings Trade Lock of the Week. For starters, I publish these recommendations at the start of the trading week a day or more in advance of when the stone-cold lock of the week trade will be releasing earnings results.
The rule of thumb is to execute these trades near the close of trading before the news is announced. In so doing, you can evaluate market action and specific movements of the trade in question before placing your trade.
If, as was the case in last week’s stone-cold lock of the week, Blue Nile (NILE), shares move significantly in the direction that we are placing the trade before we place the trade, the opportunity for supersized profits will have dissipated. Trading opportunities can and will disappear.
You need to be prepared to walk away no matter how compelling the opportunity. With Blue Nile, shares fell by 10% in the trading day before earnings were released. That is well north of a 5% move that I would use for a hard rule of canceling a potential trade.
Such wild action is rare, but it does happen. With Blue Nile, shares were down hard thanks to the utter collapse of consumer brand Fossil. Blue Nile was down mostly in sympathy, but the company recovered those losses the next day despite a relatively weak earnings report.
While some of you may have still placed this trade despite the drop in share price before the event, losses on these trades are meant to be manageable. With options, our downside is limited to 100%, but the upside, as we saw with ValueClick’s (VCLK) 600% gain, is much greater. Within the entirety of earnings season our percentage of winners combined with the size of those wins allows one to easily absorb the loss on a trade that backfires.
Turning our attention to next week, stocks were weak last week thanks to renewed risk in the Eurozone crisis. It was a fairly orderly drop in share prices that included recovery attempts intraday. The action took some of the froth from equity prices thereby weakening my earnings thesis and arbitrage opportunity that suggests that stocks of individual companies are most likely to fall when earnings and guidance is released.
A new trend is brewing. Pay attention this week as the market provides more clues to help us find the next Stone-Cold Earnings Trade Lock of the Week.
Here are companies reporting this week and my next Stone-Cold Earnings Trade Lock of the Week: