Trade Alert: Earnings, 1/23/2024
One very bullish bet on a company reporting earnings tomorrow.
Note: this stock reports earnings after the close on Wednesday, but it’s currently oversold (RSI of 25) so we’re going to place a very bullish bet on it today.
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 (6)
Social data: +65
PA Options sentiment: Very Bullish.
Setup rating: 3
Valuation rating: 4
F-Score: 6
Recent insider transaction(s): Net open market sales peaking last April.
Zacks ESP: -1.04%
Zacks Ranking: 2
RSI: 25
Short Interest: 3.14%
Since our composite score is so high for this one, we’re going to be a bit more aggressive than usual in structuring our options trade on this one.
Details below.
Bullish Trade #1
The stock is Tesla (TSLA 0.00%↑), and our trade is a vertical spread expiring on January 26th buying the $215 strike calls and selling the $217.50 strike calls for a net debit of $0.85. The max gain on 4 contracts is $660, the max loss is $340, and the break even is with TSLA at $215.85. This trade filled at $0.85.
Exiting This Trade
I’m going to place a GTC order to exit this trade at a net credit of about 90-95% of the spread, and lower that price if necessary as we approach expiration.
I think we'll have an opportunity to make money on Tesla at some point this year, but not this week. The stock is clearly in a downtrend, and I'm not quire sure where the bottom is, but I remain a long term bull. We'll keep an eye on it.