Hola amigos!

At the risk of being repetitive, today I will once again touch on the danger of trading anything other than a pure earnings trade during earnings week. But instead of expanding on the “why’s”, I will illustrate it with an example. Imagine you have an ongoing trade on Facebook and the announcement is this week, and you are trying to decide whether to stay in the trade or exit prior to it. You can very well make the following assessment of the situation:

“I currently have a naked put on Facebook, sitting well out-of-the-money. It has shown nothing but strength since the scandal & its fundamentals are solid. The chart shows a very solid bullish trend & it has not moved a lot on previous earnings announcements anyways. Moreover, my naked-put is below a very strong support ($185) and the 20 and 50 MA. I will stay in…”

Is it anything wrong with this analysis? What do you guys think? I would say it’s pretty accurate, actually. The observations are correct, the charts show what they show, and the delta of these ongoing trades indicates that there is plenty of cushions and a very low probability of something going south. But folks, I’ve seen that movie before and me-not-like-it. Sorry to break it to you, but your assessment is WROOOOONG. And simply because Earnings couldn’t care less about your technical analysis. It’s just a period in the market that you have to treat differently than the rest of the year, and that’s why the Tackle folks teach us specific strategies to trade earnings. Look at FB chart only a couple of days post-earnings. And let me ask you, does it worth the risk? For what? Couldn’t you just wait two weeks?

I know exactly what you were thinking when you placed the trade, because I’ve done it myself (unfortunately). As we know, the Devil is in the details, and he is also a Market Maker. He shows you a low hanging apple in the form of a very high premium option, so you can’t resist and sell it even knowing earnings is standing in between you and your $150 per contract at expiration. And then BAAAANG. By Felicia…see the chart below.

Facebook dropped from $217.5 to $176.26 (19%) in one single trading day and now your “safe out of the money” bull put spread or naked put is in max-loss territory. Well played.

This introduction will allow me to share with you my two favorite things to do during earnings: Adopting the “Tiger position”, and taking care of my garden. Let’s talk about them one at a time.

Tiger Position

Ok, hold on there. I know exactly what you are thinking about when you read “Tiger Position”. Shame on you, dirty mind. Well I hate to break it to you Mr. Kamasutra but no, I will not describe THAT tiger position…I am talking about this one:

See, the fact that we might not actively trade during earnings does not mean we don’t do anything. I still spend the same amount of time, if not more, analyzing the Clean and Dirty lists. Looking for the best set-ups, thinking about potential trades depending on earnings outcome, reviewing past earnings moves, reading the news about those stocks, simulating trades. Essentially, I am studying my pray in silence…and getting ready to attack. That is the Tiger Position. We need to be ready to go for post earnings. Let me share with you some of my favorites prays right now, to hopefully trade next week:

AMD

I’ve been staring at this one for a couple of weeks now. It has shown strength lately, based on their statement that they are not only crypto-mining dependent and that they have many other income sources. It looks like Wall Street believed them and it was actually confirmed with numbers during last week’s earnings. AMD looks solid, I think it can keep moving north. Now, I will not jump in right now after an 18% boost. Instead, I will wait for a retracement. How deep? Well, deep enough to allow me to issue naked puts below that $14.7 support. If I look at let’s say a $14.5 naked put today, that contract is sitting at 0.05 delta with basically no premium so it’s not worth it. What if it never goes back down? Well, in that case I will let it move north and issue a $16 or $17 naked put, below the higher support. Be ready, either case will most likely happen this week.

SPWR

Look at this beauty…as Beethoven said, this is music for my years! (cuack). Going down to a multi-year support around $6.80, I will be waiting for it to kiss it and go back up. If you have ever done snorkeling, you probably hold your breath and went down to see the coral, looked at it for a second and then went back up immediately. I am hoping that Monday’s earnings will be that “looking at the coral” moment for SPWR. Now, it does not have to jump up tremendously, for me a solid demonstration of respect for that support is enough to issue naked-puts right below it. I am targeting Wednesday or so.

X

It has struggled to break above $38ish many times now, and at the same time it has respected the $33 support as, so basically it has done nothing but channeling which means money for us naked-put sellers. I can see two things happening. One, basically nothing and in that case once it moves south a little bit I will issue naked-puts below $33 again. Two, and I think most likely, it will show strenght on earnings and finally break above $38. Maybe these guys are able to show some early profits due to the tariffs, and that could trigger a break out (and also a tweet from Trump patting himself on the back). If the latter occurs, then I will issue naked puts as well. Timing is end of next week, beginning of the following one.

TSLA

This one will be interesting. People is getting tired of the “TSLA still not making money” thing, and also as we all know Elon is losing his mind a little bit. However, despite all the uncertainty and craziness, $300 and $270 are still very solid supports and they keep holding. I just exited a bull-put spread with profits last week. So, definitely popcorn on the side until earnings, but I am planning on keep on trading it the same way I’ve been doing throughout the entire year, with bull-put spreads below those two supports. Right now is sitting at $300 so if it shows strength on earnings and moves away from it, that would be an ideal time for me to do it again.

AMAT

Sitting at a multi-year support and getting closer to earnings, I love this set-up. I currently have naked puts at $42 which I’ll exit right before earnings, or once they worth less than $0.05, whichever occurs first. I like the triple (even quadruple) bottoming behavior on$45 and I think AMAT has the potential to swing back up. As you can see, I try to look for patterns that allow me to sell puts or spreads below strong supports, on top of the delta and theta rules. That’s an edge.

EXC

“I wanna know what bullish is…I want you to show meeeee” Ok, Mariah, I’ll show you what bullish is. Look at Exelon Copr. How can you not love this trend? Perfect swings, ignoring all the noise in the market and moving at a solid pace. I will wait fori post-earnings but I think it will just keep going. It is sitting in a previous resistance though, but if it breaks I am considering EXC as an investment candidate, to buy shares and hold them, then sell calls against. Beautiful chart.

Folks, stay safe this week and be patient as we will be done with earnings shortly. Remain in Tiger Position, find nice setups and simulate trades you could place based on different outcomes post-earnings. That will get you ready to go beforehand.

Gardening

I told ya I like to do two things during earnings. One of them is to adopt the Tiger Position and prep upcoming trades, the second one is to take care of my garden. This one is by far the one I enjoy the most. During the last blog I showed you some tools I bought with EH profits, but I haven’t started building it yet for a few reasons. First, it’s 100 F in Houston. Miserable. Second, I am still deciding about the layout and I might even buy a few more things. Third, I need to plant the seeds and let them grow for a few weeks before moving them outdoors so I have a little bit of time to get the rooftop ready. This week I have been planting some veggies in indoor pots, in which they will remain for about 4 weeks from now. I have carrots, pumpkins, and tomatoes as newborns on top of the existing basil, tomato, parsley and kale that I already have.

As I always say, I think gardening is much like trading as it requires first to learn a set of skills and once you have them, it is very much related to being patient and having a proper management. Without those two, no matter how lucky you are or how much you know about your plants…you will lose your entire garden. Trust me, it happened to me when I was a kid. We had a lot of veggies at home and overnight we had a killer insect that wiped out the entire garden in one week. Frost, overheat, overwatering, all those are things that can also ruin your the garden. And as we build it, I will make sure I share with you some hedging and management techniques for it as well. So if you haven’t started yet, this week is a good time to do it so we can share the process.

Finally, as if it was trading itself, this week I issued new trades (planted new seeds) 40-60 days out, and at the same time, I collected some profits from the Kales and Basil to cook breakfast and lunch. Don’t you believe it? Check it out by yourself…

P.S: Wait until the end…

Cheers,  

Franco.