The period of time heading into an earnings report can be interesting on a number of different levels and I stress this to my students at Trading Advantage.
PRE-EARNINGS PATTERN
There is the obvious anticipation of the report and subsequent expansion of implied volatility calendars, which present trade signal opportunities. But, you also have something the market rarely gives us —a degree of certainty. Although past performance is no guarantee of future results, there tends to be a distinct pattern as the time to the release of the earnings reports nears. Namely, implied volatility will hold steady or even increase.
ADSK GAINED ON GUIDANCE
Let’s look at an example: Autodesk (ADSK). ADSK is a design software and services company. The company serves customers in the architecture, engineering and construction, manufacturing, digital media and entertainment industries. They are set to release their earnings report on November 11. On Wednesday October 2, they issued guidance for the fourth quarter and announced plans to acquire another company (essentially pre-releasing at least part of the report). The stock actually was up on this news.
IMPLIED VOLATILITY IS CHEAP
Implied volatility cratered, yet October vol (not included in the upcoming earnings report) was still above November vol (included in the earnings report). So, we have the opportunity to acquire vega-rich implied vol (November) on the lower end of the trading spectrum while affording us the opportunity to sell a quickly decaying front month (October) with the next set of data points available after the expiration of the October.
BOTTOM LINE?
Lean on past experience with respect to earnings.
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