Trade Alert: Earnings, 2/12/2024

A recap of last week's results, plus two new bullish bets.

Note: these were the returns on our earnings trade exits last week:

1. Call spread on Snap (SNAP 6.80%↑). Entered at a net debit of $0.22 on 2/6/2024; expired worthless on 2/10/2024. Loss: 100%.

2. Call spread on Affirm Holdings (AFRM 0.25%↑). Entered at a net debit of $0.20 on 2/8/2024; expired worthless on 2/9/2024. Loss: 100%.

3. Call spread on ELF Beauty (ELF 1.02%↑) (buying the $172.50 strike calls and selling the $175 strike calls). Entered at a net debit of $0.90 on 2/5/2024; exited at a net credit of $1.00 on 2/8/24. Profit: 11%.

4. Call spread on ELF Beauty (ELF 1.02%↑) (buying the $162.50 strike calls and selling the $165 strike calls). Entered at a net debit of $1.10 on 2/5/2024; exited at a net credit of $2.24 on 2/8/2024. Profit: 104%.

5. Call spread on Estée Lauder (EL 2.44%↑). Entered at a net debit of $0.40 on 2/2/2024; exited at a net credit of $0.95 on 2/5/2024. Profit: 138%.

6. Put spread on NetGear (NTGR -10.69%↓). Entered at a net debit of $0.35 on 2/7/2024; exited at a net credit of $0.85 on 2/8/2024. Profit: 143%.

Let’s see if we can do better this week. We’re starting with two bullish trades, one on a company reporting after today’s close, and one on a company reporting before tomorrow’s open.

Our Current Approach

Recall that we’re using these ten factors when evaluating earnings trades,

• LikeFolio’s earnings score based on social data. The higher the number, the more bullish, the lower (more negative) the number, the more bearish.

• Portfolio Armor’s gauge of options market sentiment.

• Chartmill’s Setup rating. On a scale of 0-10, this is a measure of technical consolidation. For bullish trades, we want a high setup rating; for bearish trades, a lower one.

• Chartmill’s Valuation rating. On a scale of 0-10, this is a measure of fundamental valuation incorporating common rations like P/E, PEG, EBITDA/Enterprise Value, etc. For bullish trades, the higher the better the Valuation rating the better; for bearish trades, the reverse.

• Zacks Earnings ESP (Expected Surprise Prediction). This is a ratio of the most accurate analyst’s earnings estimate versus the consensus estimate.

• Zacks Ranking. This goes from 1 to 5, with #1 ranked stocks being their most bullish ones. They grade on a bell curve, so most stocks we see end up with their #3 (neutral) ranking.

• The Piotroski F-Score. A measure of financial strength on a scale from 0-9, with 9 being best.

• Recent insider transactions.

• RSI (Relative Strength Index). A technical measure of whether a stock is overbought or oversold. We’re looking for RSI levels below 70 for bullish trades and above 30 for bearish ones.

• Short Interest.

And we’re keeping track of each metric on a range from very bearish to very bullish, and tracking them and their performance in a spreadsheet, a snippet of which is below.

And we’re using their relative outperformance or underperformance versus all of the stocks that we’ve analyzed to adjust our weightings of each metric to determine which stocks we should be bullish or bearish on ahead of earnings.

The Stock We’re Bullish On

The number in parentheses represents our composite score for a stock, based on all the metrics: higher = more bullish, and lower (more negative) = more bearish.

Bullish Stock #1 (2.9)

1. Social data: +29

2. PA Options sentiment: Very Bullish.

3. Setup rating: 2

4. Valuation rating: 2

5. F-Score: 5

6. Recent insider transaction(s): None in the last 12 months.

7. Zacks ESP: 1.02%

8. Zacks Ranking: 1

9. RSI: 70

10. Short Interest: 2.13%

Bullish Stock #2 (1.9)

1. Social data: +23

2. PA Options sentiment: Neutral.

3. Setup rating: 8

4. Valuation rating: 5

5. F-Score: 6

6. Recent insider transaction(s): No open market transactions in the last 12 months.

7. Zacks ESP: 2.73%

8. Zacks Ranking: 2

9. RSI: 48

10. Short Interest: 1.49%

Details below.

Bullish Trade #1

The stock is Shopify (SHOP 0.00%↑), and our trade is a vertical spread expiring on February 16th, buying the $91 strike calls and selling the $92 strike calls for a net debit of $0.40. The max gain on 8 contracts is $480, the max loss is $320, and the break even is with SHOP at $91.40. This trade hasn’t filled yet. This filled at $0.40.

Bullish Trade #2

The stock is Principal Financial Group (PFG 0.00%↑), and our trade is a vertical spread expiring on February 16th, buying the $80 strike calls and selling the $85 strike calls for a net debit of $1.15. The max gain on 3 contracts is $1,155 (unlikely), the max loss is $345, and the break even is with PFG at $81.15. This trade hasn’t filled yet. This filled at $1.15.

Exiting These Trades

Assuming these trades fill, I’m going to place GTC order to exit at 90% to 95% of the spread on the SHOP trade, and one at 70% to 80% of the spread on the PFG trade, and lower the prices as necessary as we approach expiration.