Trade Alert: Earnings, 2/14/2024

One bullish trade and one bearish trade on companies reporting today and tomorrow.

Note: we had our first trade exit of the week yesterday, and our second, less impressive, exit today.

1. Call spread on Principal Financial Group (PFG 0.00%↑). Entered at a net debit of $1.15 on 2/12/2024; exited at a net credit of $2.34 on 2/13/2024. Profit: 103%.

2. Call spread on Topgolf Calloway Brands (MODG 13.33%↑). Entered at a net debit of $1.20 on 2/13/2024; exited at a net credit of $1.65 on 2/14/2024. Profit: 38%.

Today, we’ve got another bullish bet and another bearish bet.

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 Stocks 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 (2.8)

1. Social data: +51

2. PA Options sentiment: Neutral

3. Setup rating: 3

4. Valuation rating: 0

5. F-Score: 4

6. Recent insider transaction(s): Net open market sales almost every month, peaking last March.

7. Zacks ESP: 0%

8. Zacks Ranking: 3

9. RSI: 51

10. Short Interest: 15.93%

Bullish Stock #2 (2.4)

1. Social data: +25

2. PA Options sentiment: Extremely Bullish

3. Setup rating: 3

4. Valuation rating: 2

5. F-Score: 5

6. Recent insider transaction(s): A large open market purchase last May, but overall net open market sales peaking in December.

7. Zacks ESP: 108.33%

8. Zacks Ranking: 3

9. RSI: 54

10. Short Interest: 9.29%

The Stock We’re Bearish On

Bearish Stock #1 (-1.5)

1. Social data: -28

2. PA Options sentiment: Bearish

3. Setup rating: 7

4. Valuation rating: 4

5. F-Score: 5

6. Recent insider transaction(s): Net open market sales in March and June.

7. Zacks ESP: -3.24%

8. Zacks Ranking: 3

9. RSI: 45

10. Short Interest: 2.14%

Details below.

Bullish Trade #1

The stock is QuantumScape (QS 0.00%↑), and our trade is a vertical spread expiring on February 16th, buying the $7.50 strike calls and selling the $8.50 strike calls for a net debit of $0.35. The max gain on 10 contracts is $650, the max loss is $350, and the break even is with QS at $7.85. This trade filled at $0.35.

Bearish Trade #1

The stock is Wyndham Hotels (WH 0.00%↑), and our trade is a vertical spread expiring on February 16th, buying the $80 strike puts and selling the $75 strike puts for a net debit of $2. The max gain on 2 contracts is $600, the max loss is $400, and the break even is with WH at $78. This trade filled at $2.

Exiting These Trades

Assuming both trades fill, I’m going to place GTC orders to exit at 90% to 95% of the spreads, and lower the prices as necessary as we approach expiration.