Trade Alert: Earnings, 7/18/2023

Two bearish trades and one bullish one.

Off To A Profitable Start

We had one earnings trade yesterday, a bullish one on Morgan Stanley (MS 0.00%↑), and we exited it today for a gain of 88%.

Companies Reporting On Wednesday

We’ve got one bullish and two bearish trades on companies reporting earnings tomorrow. We’re looking at four metrics when placing these trades:

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

2. Portfolio Armor’s gauge of options market sentiment.

3. Chartmill’s Setup rating. On a scale of 1-10, this is a measure of technical consolidation. For bullish trades, I want a high setup rating; for bearish trades, a lower one.

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

I’m looking for 1 or 2 of the other signals to agree with the social data, but I’m also using my judgment based on past performance of these signals. For example, our bullish trade for today has a LikeFolio earnings score of +23, a slightly bullish options market sentiment rating from Portfolio Armor, a setup score of 8 from Chartmill, and a -0.09% Earnings ESP from Zacks (basically neutral).

Details on all three trades below.

The Trades

Bullish

• International Business Machines (IBM 0.00%↑). A vertical spread expiring on 7/21 buying the $134 strike calls and selling the $135 strike calls for a net debit of $0.48. The max gain on 2 contracts is $364, the max loss is $336, and the break even is with IBM at $134.48. This trade hasn’t filled yet. This one filled at $0.48 on 7/18.

Bearish

• Tesla (TSLA 0.00%↑). Both LikeFolio and Portfolio Armor are bullish on Tesla over the longer term, but here we’re concerned with the very short term. Tesla has an earnings score of -51 from LikeFolio (who nailed its earnings miss last quarter), and it has a setup rating of 3 from Chartmill, since its stock has run up a lot since its last earnings. Zacks does have a positive Earnings ESP for it of 2.97%, but I’m betting against it here. My trade is a vertical spread expiring on July 21st buying the $285 puts and selling the $282.5 puts for a net debit of $1.20. The max gain on 3 contracts is $390, the max loss is $360, and the break even is with TSLA at $283.80.

• Discover Financial Services (DFS 0.00%↑). The trade is a vertical spread expiring on July 21st buying the $120 strike puts and selling the $119 strike puts for a net debit of $0.38. The max gain on 8 contracts is $496, the max loss is $304, and the break even is with DFS at $119.62.

Exiting These Trades

For trade, I’m setting a limit order to exit at 85-90% of the spread initially. So, for example, with IBM, the spread is $1 ($135 - $134), so I’ll try to exit at a net credit of $0.85 or $0.90. If I don’t get that after the earnings release, I’ll lower my limit price and take what I can get before expiration.