We would all like to get a piece of this monster before it makes a move post earnings. After all, it’s the ‘gift that keeps on giving’. Management does not lead the horses, er analysts to any predictable number – seems they all have to do some work to arrive at some kind of decent earnings estimate. In most cases these analysts are completely wrong and end up scrambling make it better. I use a different approach.
Now, arguably Google has been one of my best plays when it comes to earnings. It has also been a disappointment for me, but mostly it’s been good. Back in October 2010 I mentioned on the Real Money blog of buying out of the money calls prior to earnings – they worked extremely well. Also in that period I mentioned it on twitter and to a prominent player in the community – he crushed it (click the link). This type of play happens about once every two years.
Chart and technical data give us a good look into reliable and predictable patterns for stocks. It’s far from perfect but we end up finding situations where pricing at a certain moment is not reflecting the movements. We use implied volatility to check the cost of options, we know marketmakers price in earnings at a high level on expectations. As usual, the uncertainty is priced in, the market expecting about a 5.5% move either way after earnings. So, what are the charts telling us?
With Google it seems past is prologue. I look for similar stock patterns as the past, excessive readings on technicals and option pricing. Ironically, the stock pattern on the daily chart is very similar to the one seen in July 2009, where the stock rallied strong, the bollinger bands widened but the stock stalled after earnings. We could see the same reaction. I’m going to sit this one out but will look to add something if the stock exceeds 560 or so. The options that expire tomorrow are priced in heavily. So, would it be right to sell options? Not quite the best way to go because the bollingers are both widening and are opening at extremes, the hourly chart is stagnant. The move to sell options this time around is opening the door to trouble. How about August? I like this month but will wait until after the earnings hit to make my play. (chart below)
