Intel presents an insightful case study for the types of opportunities I look for during earnings season. Much of the time we’re looking at how to trade stock into earnings via volatility trades. In this instance, I’m referring specifically to building trades after the event. The primary benefit is that you don’t have to brave the drama of the overnight gap. Instead, we’re playing either the follow-through or retracement.

Breakaway or Fill?

In gap lore, there are many different types of formations. The one that I find the most actionable post-earnings is the breakaway gap, but sometimes playing for a gap fill can work too. You can tell the difference by how far the stock has gapped and where the jump lies relative to its overall trend.

Let me show you Intel as an example.

The Intel Gap

Intel shares entered earnings in a holding pattern. The sideways consolidation made it easy to spot major support ($56) and resistance ($64). A breach of either level had a good chance at creating a breakaway gap because they could catch a lot of traders on the wrong side of the move.

On Friday, Intel opened down 13.6% after a disappointing report. Not only did we break support, the gap size far exceeded expectations. Tack on the fact that it traded lower throughout the morning and this had all the makings of a breakaway gap. Even if you wanted to bet on a gap fill, it never triggered. That is, it never traded above the first 5-minuted bar’s high to signal buyers were swarming.

I chose to build a bearish trade Friday morning, electing for a bear call spread. In addition to the above logic, I reasoned that even if we did rally back, it would get sold relatively quickly. INTC is now below all major moving averages with major resistance overhead.

Suppose we sold the Aug $55/$57.50 bear call for 33 cents. I would have gone even further OTM, such as a $57.50/$60 bear call, but there wasn’t enough premium. I started with a smaller size to allow room to add contracts if we did bounce. The 33 cents may not sound like much, but it translated into a 15% return.

What’s nice about my entry is the implied volatility crush hadn’t been fully priced-in. Sometimes it takes a full day for the drop to play out.

Fast forward to Monday (one day later) and the bear call has gone from 33 cents to 10 cents. It’s impressive how quickly the premium has come out of the calls, even though the stock is only down 2%. The quick deflation was partly due to implied volatility continuing to fall.

Not every post-earnings play works out this rapidly, but it’s sure nice when it does. This was a 26 day trade and in the first day it made approximately 70% of max profit. I like to call that a payday advance.

A lot of other tech companies (MSFT, NFLX, TSLA,IBM) have had gaps that were too small to do anything with.

Were the stock to gap up and break through resistance (think AMD if last week’s jump had been in response to earnings), then I’d consider selling puts or bull puts on the morning of the gap to play the breakaway.

The Netflix Gap

A second pattern I like for is when a strong uptrending stock gaps down and then trades lower for multiple days. When it gets oversold enough, I like to look for signs of strength and then sell bull puts. Netflix is the closest example I’ve seen so far this earnings season. It was in a powerful weekly uptrend and the post-earnings drop lowered it all the way to its rising 50-day moving average. It was also down almost 20% from its highs.

In the case of NFLX, you could have triggered in on Friday when it broke intraday resistance, or today when it took out Friday’s high. The spread I was looking at on Friday was selling the Aug $420/$415 bull put for 55 cents credit.

We have a slew of high profile companies reporting this week. Keep an eye out for these patterns in the aftermath of the gaps.

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