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3 Earnings Trades for High Probability Profits

Gear up for NFLX, INTC and IBM earnings with these trades

earnings trades - 3 Earnings Trades for High Probability Profits

Source: Shutterstock

Earnings season is heating up this week with almost 300 public companies revealing their latest financials. Some will dazzle, while others disappoint. The fickle inhabitants of the Street will reward the standouts with outsized overnight gains, while punishing those who fall short. With that said, today we’ll look at three earnings trades that are reporting this week.

It’s not a coincidence that all of today’s stock picks come from the technology sector. Because of its elevated volatility and higher growth rates, tech stocks are usually the biggest movers each quarter.

Unlike banks, utilities, REITs and consumer staples, tech stocks see significant fluctuation in options prices around these events — making them more interesting, and potentially profitable, to trade.

We’ll size up the price-move expectations and implied volatility characteristics of each. Then, offer up an options trade idea to capitalize.

3 Earnings Trades for High Probability Profits: Netflix (NFLX)

Earnings Date: Tuesday After Market Close

3 Earnings Trades for High Probability Profits: Netflix (NFLX)
Source: The thinkorswim® platform from TD Ameritrade

Netflix (NASDAQ:NFLX) is no stranger to earnings trades lovers. Every three months, the streaming media king is among the biggest movers, frequently seeing double-digit percentage moves. It is heading into Tuesday’s event with its uptrend intact, along with rising 20-day and 50-day moving averages confirming bulls’ dominance in the short- and intermediate-term.

That said, it hasn’t made much forward progress since Dec. 20, settling instead into a holding pattern. No doubt, Tuesday’s report will determine the direction of the next swing. Implied volatility experienced the usual pre-earnings ramp, rising to 42% or the 47th percentile of its one-year range. That translates into an expected move of $23 or 6.8%.

Rather than picking the path of the jump, I suggest playing volatility instead. That is, bet on the magnitude of the move instead of the direction. You have two choices:

Bet on a larger than expected move with debit condors. Buy the Feb $310/$305 bear put spread and $365/$370 bull call spread for a net debit around $2.40.

Bet on a smaller than expected move with iron condors. Sell the Feb $285/$290 bull put and $385/$390 bear call for a net credit around $1.

Intel (INTC)

Earnings Date: Thursday After Market Close

3 Earnings Trades for High Probability Profits: Intel (INTC)
Source: The thinkorswim® platform from TD Ameritrade

Intel (NASDAQ:INTC) is another member of this week’s top earnings trades. The stock has ridden the semiconductor bull market wave to its highest levels since 2000. Earnings anticipation has buyers swarming this morning, with INTC stock up almost another 2% at one point. All major moving averages are rising and reflect bulls’ dominance across time frames.

Chip stocks have been on fire, and I’d be extremely hesitant to bet against INTC going into earnings. If you’re willing to bet the stock is likely to gap higher after the event, or at least not drop too far, then naked puts are worth a shot. Implied volatility is running hot at 31%, or the 66th percentile, of its one-year range. So premiums are ripe for the selling.

With all of that in mind, sell the Feb $57.50 puts for around 95 cents.

IBM (IBM)

Earnings Date: Tuesday After Market Close

3 Earnings Trades for High Probability Profits: IBM (IBM)
Source: The thinkorswim® platform from TD Ameritrade

While the rest of the tech sector has been skirting the stratosphere, IBM (NYSE:IBM) has been mired in mud. The last of my earnings trades favorites has seen little traction gained in the past year, and each recovery attempt has been stamped out in short order — resulting in a dead money stock. I’m inclined to bet with the trend continuing here. In other words, build an trade that banks on IBM stock remaining in its range after earnings.

Implied volatility rallied up to 25%, and now sits at the 46th percentile of its one-year range. Premiums are pricing in a move of $5.80 or 4.2% in response to earnings tonight. If you’re willing to wager IBM moves that much or less, then sell iron condors.

Sell the Feb $129/$124 bull put and $145/$150 bear call for a net credit of $1.28.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/3-earnings-trades-high-probability-profits/.

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