Trade Alert: Earnings, 2/15/2024

Two bearish bets on companies reporting today.

Note: we’re taking advantage of the market bounce here to add a couple of short bets at better prices than we would have gotten on Tuesday.

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 Bearish 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.

Bearish Stock #1 (-0.8)

1. Social data: -63

2. PA Options sentiment: Very Bullish

3. Setup rating: 3

4. Valuation rating: 1

5. F-Score: 5

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

7. Zacks ESP: -15.30%

8. Zacks Ranking: 3

9. RSI: 72

10. Short Interest: 4.36%

Bearish Stock #2 (-2)

1. Social data: -65

2. PA Options sentiment: Bullish

3. Setup rating: 6

4. Valuation rating: 2

5. F-Score: 7

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

7. Zacks ESP: 0%

8. Zacks Ranking: 4

9. RSI: 63

10. Short Interest: 3.09%

Details below.

Bearish Trade #1

The stock is DraftKings (DKNG 0.00%↑), and our trade is a vertical spread expiring on February 16th, buying the $43 strike puts and selling the $42 strike puts for a net debit of $0.47. The max gain on 7 contracts is $371, the max loss is $329, and the break even is with DKNG at $42.53. This trade filled at $0.47.

Bearish Trade #2

The stock is The Trade Desk (TTD 0.00%↑), and our trade is a vertical spread expiring on February 16th, buying the $74 strike puts and selling the $73 strike puts for a net debit of $0.48. The max gain on 7 contracts is $364, the max loss is $336, and the break even is with TTD at $73.52. This trade filled at $0.48.

Exiting These Trades

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.