Trade Alert: Earnings, 5/22/2023

One bullish trade to start the week. Plus a note about market sentiment and banks.

Spanish goalkeeper David de Gea plays a big role in one of the companies we’re focusing on this week.

Market Sentiment: FOMO?

In a premium post yesterday (“First Sentiment Shift Of 2023: S&P Breakout Sparks FOMO Frenzy, Hedge Fund Buying”), ZeroHedge quoted data from Goldman Sachs’s prime brokerage desk (the group that executes trades for hedge funds) saying they saw the largest net buying last week in four months. Assuming that presages another more gains for the market this week, there are two things I want to do:

1. For the short term (expirations over the next week or two): place more bullish than bearish earnings trades this week. I’ve got bearish ones in mind too, but I’m going to aim for more bullish than bearish bets for the week as a whole.

2. For the longer term (expirations over the next two or three months): place more bearish bets against regional banks.

On the second point, you may recall this post from a couple of weeks ago:

I ran into a bit of a setback with that, in that the banking expert I alluded to there backed out of our deal, but I am working on getting that list elsewhere. Hopefully, last week’s regional bank rally continues in the meantime.

My thesis regarding the regional banks remains the same, though. Ideally, our list will identify banks likely to go bust, but we ought to be able to profit betting against them either way, because the banks are caught between a rock and a hard place with interest rates at current levels: they can continue to see depositors leave and risk a bank run, or they can raise their deposit rates high enough to keep depositors, which will squeeze their bottom lines. So what I’ll probably do with the list is make bearish bets expiring after their Q2 earnings, and then once we see those Q2 earnings, make longer term bearish bets on the worst performers.

Now on to today’s earnings trade.

This Week’s First Earnings Trade

Our first earnings trade is a bit different from our recent ones in that we’re looking for a bigger move here. Three out of the last four post-earnings moves for this stock have been double digits to the upside, so we’ve structured a trade betting on a similar move, one that offers about 4x more potential upside than downside.

Details below.

1. DICK'S Sporting Goods, Inc. ( DKS 0.00%↑). Bullish social data, and a history of larger recent post-earnings moves. The trade: a spread expiring on May 26th buying the $135 strike calls and selling the $136 strike calls for a net debit of $0.24. The max gain on 14 contracts is $1,064, the max loss is $336, and the break even is with DKS trading above $135.24.

Exiting This Trade

For each earnings trade, I’m opening a Good ‘till Canceled limit order to close it at a net credit of about 85% of the spread (so, in the case of DKS, at about $0.85). If that order doesn’t fill the day after earnings, I’ll lower the limit price as necessary.

Below is a message from our sponsor, SpreadHunter.

---

For traders getting started with options and option spreads, SpreadHunter offers a comprehensive and reassuring environment – where asking questions is a plus. Run by ex-CBOE professionals with close to 50 years trading experience (each), we will train you how and why to enter and manage complex options strategies, and how to deal with today's changing and often unpredictable market environment.

To set up a one-on-one live demonstration during market hours, contact David A. Janello, PhD, CFA at david.janello@spreadhunter.com.

For more information:

https://spreadhunter.com

Interested in opening a TradingBlock brokerage account? Click here:

https://www.tradingblock.com/affiliates/public/spreadhunter.aspx