DAL earnings, announced July 19, sent the into a sharp decline to 11.3% below the prior day's close. After 15 minutes in the cellar, the price began a rapid recovery, and closed the day within a nickel of its opening price. Since then it has traded pretty much sideways, until a rise this morning moved it above the five-day range.
The earnings surprise wasn't surprising enough to gain a profit for a straddle contract (an options combination of a put and a call, each with the same expiration and strike price). A short sales would have made a profit had the trader been nimble enough to get out near the low, a neat trick with a stock moving so fast.
The parabolic sar remains in bear phase and so contradicts the pps. The macd moved to bull phase on Friday, and the fast stochastic is rising toward the 80-line.
The bear phase on the pps began the day before earnings and produced a 4.4% decline.
The lesson here for traders like me is one of magnitude. Earnings suprises can be played direction-neutral purely for volatility, using an options straddle. Or directionally, using long or short stock positions, or by buying calls or puts.
A directional-neutral approach requires a greater move to overcome the hedging effects. A directional play, while riskier if the trader picks the wrong direction, will produce a profit on a smaller move.
Six days before the earnings announcement, DAL was a lightly downtrending to sideways stock that had just moved to bull phase on the psar, the pps and the macd. As a trader, I would read those signals as an expectation of an earnings surprise to the upside. But, of course, then the true surprise would be one to the downside.
And that chain of "yes, but" reasoning can go on ad infinitum. So I conclude that the proper earnings surprise play for DAL is to not play it at all, since the price was essentially directionless. There's no way rationally to declare one direction or another to be a surprise.
A strongly trending stock would be the proper vehicle for a direction-based surprise play -- by betting on the direction opposite the trend. A risky business, but risk is the mother profit.
|pps||pps open||upper pivot||lower pivot|
- $12.40, +4.4%
- $11.88 <== You are here.
- $11.76, -1.0%
- $10.40, -12.5%
OK. The credit bubble burst. Housing, burst. Shockwaves reverberated. Markets collapsed. What lies ahead as we reemerge from the wreckage.
Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment. No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.Abbreviations:
- psar - Parabolic Stop and Reverse
- adx - Average Directional Index
- pps - Person's Proprietary Signal
- ma20 - 20-day moving average
- macd - Moving Average Convergence-Divergence
- sto - Fast Stochastic
- trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways
- adx: orange for above 30-up, blue for 20-down, purple for in the middle. Red is most prone to whipsaws
- psar, pps, macd: green for bull mode, red for bear
- sto: green for overbought, red for oversold, yellow for the neutral zone.