Trade Alert: Earnings 8/14/2023

Betting against one stock reporting after the close and betting on one reporting later this week.

From the company we’re betting against.

Learning From Last Week’s Trading Experiment

In Friday’s Exits post, I mentioned one lesson I drew from last week’s trading experiment, where we incorporated Piotroski F-Scores into earnings trades.

I wrote that Piotroski F-Scores seemed to make more sense over longer time periods than the few days surrounding an earnings report:

Going forward, I plan to be more selective about earnings trades, mostly placing ones that look like they’d make sense over a time period straddling two earnings reports. That should take some of the randomness out of our returns.

The selective part I am sticking with: we’re probably only going to do two or three earnings trades this week. For the most part, I plan to stick with the longer time periods as well, but that doesn’t work for our bearish trade today, where the cost of covering two earnings reports is about 3x that of a trade expiring this week. It’s an atypical situation, where we’re limited to straight puts rather than a spread that would be more cost-effective over a longer time period. For the bullish trade we’re entering today, we will go out a few months.

Adding A New Metric

Recall that we’ve been looking at five metrics recently when placing these earnings trades:

1. LikeFolio’s earnings score based on social data. The higher the number, the more bullish, the lower (more negative) the number, the more bearish.

2. Portfolio Armor’s gauge of options market sentiment.

3. Chartmill’s Setup rating. On a scale of 1-10, this is a measure of technical consolidation. For bullish trades, I want a high setup rating; for bearish trades, a lower one.

4. Zacks Earnings ESP (Expected Surprise Prediction). This is a ratio of the most accurate analyst’s earnings estimate versus the consensus estimate.

5. The Piotroski F-Score. A measure of financial strength on a scale from 0-9, with 9 being best.

One metric I’m adding to the mix this week is insider buying and selling. Like most other metrics, this is best considered in a broader context. Insider sales aren’t always bearish, for example, but if we’re considering betting against a small company and there’s been large, recent insider buying, that would cause me to reconsider.

The Company We’re Betting Against

Here’s how our bearish name scores on those metrics:

• Social data earnings score: -86

• PA Options Market Sentiment: Bearish

• Setup rating: 3

• Zacks ESP: 0% (neutral)

• F-Score: 3

• Recent insider transactions: net sales

The Company We’re Betting On

Here’s how our bullish name scores:

• Social data earnings score: +24

• PA Options Market Sentiment: Bullish

• Setup rating: 8 (this is why we’re placing the trade today, even though the company reports later in the week).

• Zacks ESP: +2.03%

• F-Score: 8

• Recent insider transactions: net sales

Details below.

The Bearish Trade