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:
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.
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.
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.
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FYI, someone suggested I get the Substack app for alerts when I am out & about & it did send me a notification when you post! So I can not worry about missing your trade alerts!
It filled and dropped over 75%, thoughts on it going back up? I did see news about predicting a $165 price though it needs to go up to hit that. Like you mentioned last week on FTCH, which is practically gone, the social data might want to not rely on so heavily? I am like you, I don't like losing $...