Without any news about a company and how it’s performing when it comes to buying into the stock, you’d be flying blind.
Fortunately for us, we know there are four times a year that are the most important for any stock: quarterly earnings announcements.
This is the time every three months when a company peels back the curtain and lets investors see how business is going.
That’s why when this news hits the markets, we see wild swings in stocks that can send the stock up — or send it plunging — more than 10%.
Most investors think a big jump on earnings means they’ve missed their buying opportunity or that it’s time to take profits.
But I’ve found that in certain stocks, the earnings event is a catalyst for mispricing. And it’s just the start of our profit opportunity.
The best way to understand it is to see it play out.
Case Study — Facebook
One of the recent trades in my Quick Hit Profits service was social media giant Facebook Inc. (Nasdaq: FB) — and it’s almost textbook.
Facebook hit my Profit Trigger — a 5% move higher on earnings and beating analyst expectations by more than 5%.
Since it was on my shortlist of stocks, I knew this was a trade to make.
Going back to 2006, the stock has hit my profit trigger 11 times. And eight of those times the stock continued higher over the next few weeks.
That’s nearly a 73% win rate for Facebook over more than a decade. For my subscribers, anything with more than a 70% chance of profitability is worth jumping into.
Here’s the trade we made…
A Textbook Trade
On July 31, the day that Facebook reported earnings, I sent an email recommendation to grab call options on the stock. Here’s part of the alert:
Facebook’s latest results blew past analyst expectations. They reported earnings 25% higher than what analysts expected.
These phenomenal results helped send the stock up more than 5% this morning, more than enough to trigger a new trade for us.
We know analysts are behind the curve with Facebook. That’s why the stock typically climbs higher as the price adjusts to the blowout quarter. …
That’s the trend we’re looking for to profit from today.
This earnings event created a whirlwind of news to hit the stock. It takes analysts time to adjust their price targets after being behind the curve, since the company beat expectations.
But they don’t do it right away.
Many analysts take up to a month to publish new buy ratings as they work through all the news that was released in the earnings report.
That creates a mispricing for the stock as the new buy ratings create a positive feedback loop that pushes the stock higher over the next month.
Since we bought the strike price that was close to where the stock was trading, it means we picked up a mispriced option as well.
We bought the October $250 call option. And it worked out perfectly.
Banking a Triple-Digit Gain Like Clockwork
Take a look at Facebook’s price chart:
While the earnings announcement helped propel the stock, buying the options on the same day turned the stock’s 20% rally in just one month into a 203% gain for us.
This is the nuts and bolts of my approach — spot mispricings after an earnings report.
I have a shortlist of stocks that consistently trend higher after they hit my Profit Trigger.
It’s like clockwork.
A stock reports earnings … if it hits my profit trigger, then I jump in right away to capitalize on the expected move.
It worked with Facebook. And it’s worked with hundreds of other trades over the last few years.
We don’t win every single one, but it’s proven to rake in consistent, market-beating profits over the years.
We’ll dive more into option trades based on my Profit Trigger in the coming weeks, including more timely examples that still have room to profit.
Next week, I want to hear from you. We started this Weekly Options Corner to teach you more about options. And we want to answer your questions.
You can send them to our team at WeeklyOptionsCorner@BanyanHill.com.
Chad Shoop, CMT
Editor, Automatic Profits Alert