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Expectations Trump Results
This week we got lots more support for our premise that expectations are more important than the actual results when a company announces earnings. Not only did we score big-time with a bearish bet on SanDisk but we saw that expectations were dreadfully low for Google and we bought calendar spreads at strike prices much higher than the pre-earnings stock price and more than doubled our investment on both of them.
Last week I wrote a Seeking Alpha article which examined several companies that were announcing earnings this week - 3 Earnings-Related Plays For Next Week. In this article I identified two companies with unusually low expectations - AAPL and Caterpillar (CAT) and recommended placing bullish options spreads on them. CAT announced before the open today and they fell short on both earnings and revenue, and reduced future guidance as well (all bad news), but the stock is trading $2.40 higher as I write this.
We have purchased May – Apr4 calendar spreads on AAPL at the 410 and 420 strikes, paying $3.85 and $3.75 for them in hopes that AAPL moves higher than its $390 price that it closed at Friday.
We also identified a company with excessively high expectations – NetFlix (NFLX). The stock is up over $12 today in anticipation of the announcement after the close today. An analyst upgraded them today which contributed to the rise. With NFLX trading at $175 we are buying May 180 puts and selling Apr-4 175 puts as a diagonal spread. It should make money if NFLX stays flat or falls by any amount. This is the trade that you only have a couple of hours to get if you are interested.
I have written another article which I believe is very interesting but which hardly anyone has read so far - What Earnings Season Tells Us, So Far. It points out that 13 of the 15 large companies with Weekly options which have reported so far have exceeded analyst expectations but 9 of them fell in price after the announcement.
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I look forward to having you on board, and to prospering with you.
Terry
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