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Ride-the-Wave Strategy – Best for Stock Traders

Ride-the-Wave targets multi-day price momentum following a company’s earnings announcement (EA). With this strategy:

  1. Buy a stock one day post-EA if a stock reacts positively post-earnings:
    1. Near the close of trading the EA-day for a pre-market-EA
    2. Near the close of the following day for a post-market-EA
  2. Sell-to-close after 7-10 days, or possibly earlier if a desired price target is reached

Similarly,

  1. short a stock one day post-EA if a stock reacts negatively post-earnings:
    1. near the close of trading the EA-day for a premarket-EA
    2. near the close of the following day for a post-market-EA
  2. then buy-to-close after 7-10 days, or possibly earlier if a desired price target is reached

Important: Ride-the-Wave is predicated on significant price momentum triggered by an EA. The 7-10 day scenario is the maximum trade hold-time. If you see post EA-momentum is halted or reversed by a significant opposite move, re-evaluate your presence in the trade.

This popular StockEarnings screen below will give you a list of stocks that historically exhibit significant price momentum following an EA for the next seven days:

  1. Stocks exhibiting positive post-EA price moves are buy-candidates
  2. Stocks exhibiting negative post-EA price moves are sell/short-candidates

The screen includes those stocks whose Earnings just came out in last two days.

Screen criteria:

  1. Earnings Date Start Date : Current Date + -1 Day
  2. Earnings Date End Date : Current Date + -2 Days
  3. Predicted Move (Next Day) Max : 7%
  4. Predicted Move (On 7th Day) Min : 7%

Strategy Guideline:

  1. Buy the stock if stock has reacted positively. Short the stock if stock has reacted negatively (see above).
  2. Close the position in 7-10 days, or possibly earlier based on price move.

Volatility Crush Strategy - Best for Options Traders

The Volatility Crush strategy is used with stocks that typically experience relatively low-to-moderate price moves (≤4%) following their Earnings Announcements (EA). The basic trade idea is to sell put or call options right before the EA, collecting a credit when options premium is very high due to elevated implied volatility (IV). You then close the position right after the EA by buying the option back much cheaper due to the significant drop in IV that occurs after the mystery of the EA disappears. In assessing this trade, you need to do your homework to ensure you collect sufficient premium to make the trade worthwhile.

This trade is practical due to the low-to-moderate price-move after the EA, which generally won’t significantly affect the options price, unlike an “action” stock, which experience great price moves post-EA. With these symbols, if you’re on the right side of the price move, that’s a great thing. But if you’re on the wrong side of the move, not so great. Consequently, by minimizing the effect of the post-EA price move, you have a much better chance to profit from the reduction in IV without it being ruined by a violent price move.

For this trade, open the position either (1) the night before the EA when the company announces earnings or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

For this trade, open the position either (1) the night before the EA when the company announces earnings or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

This popular stockearnings screen will give you a list of stocks which do not react more than 4% fpost-EA. It includes only those stocks whose earnings are releasing next day.

Screen criteria:

  1. Earnings Date Start Date : Current Date + 1
  2. Earnings Date End Date : Current Date + 1
  3. Predicted Move (Next Day) Max : 4%
  4. Options Type: Weekly

Strategy Guideline:

  1. Options Strategy: Sell Call and Put
  2. Options Strike Price: Current Stock Price – (% Predicated Move x 2)
  3. Expiration Date: It should generally be the closest expiry immediately after the EA.
  4. Buy Insurance: Buying back Call and Put at Strike price which 10% lower than Sell Strike Price is optional but recommended.

Watch Video for More Detail

Volatility Rush Strategy - Best for Options Traders

The Volatility Rush takes advantage of increasing options premiums into earnings announcements (EA) caused by an anticipated rise in Implied Volatility (IV). With this strategy, Buy a Call and Put at-the-money (a long straddle) 2-3 weeks before the EA when IV is lower. Sell the position either (1) the night before the EA when the company announces earnings pre-market, or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

This popular screen will give you a list of stocks whose Options premiums tend to rise into Earnings. It includes only those stocks whose Earnings are at least two weeks away from today.

Screen criteria:

  1. Earnings Date Start Date : Current Date + 15 Days
  2. Earnings Date End Date : Current Date + 30 Days
  3. Predicted Move (Next Day) Min : 5%
  4. Options Type: Weekly or Monthly if that lines up with the two to three-week lead-time for entering the trade

Strategy Guideline:

  1. Buy a Straddle at or close to the money two to three weeks pre-EA.
  2. Sell the position either the night before the EA when the company announces earnings pre-market, or during the EA day when it announces post-market.
  3. Expiration date should generally be the closest expiry immediately after the EA.
  4. Straddle price should not be more 60% of predicted move.

Predicted Move (Volatility)

Similar to Implied Volatility in Options. Expected volatility % based on our Proprietary Volatility Predication Model. We are expecting that stock price will likely to reach % in either direction by the end of next trading session after Earnings are released and not necessarily the closing volatility %.

Why is it important?

    This indicator helps

  1. Knowing expected volatility in stocks after Earnings helps to decide trading stocks before Earnings Announcement.
  2. Taking Advantage of volatility collapse following Earnings Results by using Advance Options strategies such as Spread and Straddles.

Since Last Earnings

Change in share price since last Earnings release.

Why is it Important?

When share has gained more than 10% since its last Earning release, it tends to over react to minor bad news and give up some gains if not all. So, it contains more downside volatility than upside When share has dropped more than 10% since its last Earning release, it tends to over react to minor good news and recover some drops if not all. So, it contains more upside volatility than downside.

EPS Surprise (%)

Occurs when a companys reported quarterly or annual profits are above or below analysts expectations. Here is the formula to derive % EPS Surprice:

Actual EPS - Estimated EPS
------------------------------------- x 100
Estimated EPS

Why is it Important?

Earnings surprises can have a huge impact on a companys stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stocks price, but also to a gradual increase over time. Hence, its not surprising that some companies are known for routinely beating earning projections. A negative earnings surprise will usually result in a decline in share price.

Next Day Price Change (%)

Next Regular trading session Closing price following Earnings result.

For After Market Close Earnings, It is a next trading day closing price. For Before Market Open Earnings, It is the same trading day closing price.

Why is it Important?

Next Day price change is a reaction of Earnings result.

NIO Inc has confirmed Earnings date and time. It is on Wed 11 Aug (21 days ago).

The Algorithm predicts % Predicted Move After Earnings Announcement (PMAEA) for NIO three weeks prior to earnings date. Knowing PMAEA for NIO three weeks before Earnings Announcement can provide unique advantages in trading Earnings.

Please visit FAQ section to learn on how we calculate PMAEA for NIO and how we use it to trade Earnings successfully.

Earnings Date : Wed 11 Aug (21 days ago)   

After Market Close (Confirmed)

Following Earnings result, share price were DOWN 8 times out of last 11 Qtrs
So, Historical price reaction suggests 72% probability for share price to go DOWN following ER!

Since Last Earnings -14.0%

Price at Last Earnings: 43.97 Previous Closing Price: 37.80

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  • PE Ratio: -68.977

  • Estimated EPS:

  • Avg Daily Vol / Next Day Vol: / 14,939,108

    Short Ratio:

Stock Price Change Since Last Earnings Released:   -14.0%

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NIO Inc (NIO) Frequently Asked Questions

1. What does predicted % change after earnings announcement mean?

It represents the stock predicted price change after the latest earnings call. If the stock price announcement is positive, it will facilitate a percentage increase before the end of the trading session after the earnings release. A negative announcement will facilitate a percentage decrease before the trading session ends.

2. Why is the Predicted Move for NIO an important consideration for investors?

The goal for individual traders and hedge fund managers it to ensure that they continue making profits while avoiding potential losses. It would be less than ideal to have NIO in your portfolio and then the morning after the companys call, a bearish NIO performance wipes out a significant chunk of your portfolio value. Performance predictions allow traders to execute a hedging strategy to protect their portfolio from unfavorable earnings which could lead to a major price drop.

We guide our clients on how to develop hedging strategies which will cushion them from a big drop in case the company announces displeasing earnings. Options traders can leverage the predicted move using strategies such as ride-the-wave, volatility-crush and volatility rush. Predicted move also allows day traders to decide whether to trade or avoid a stock.

3. What does Predicted Move After Earnings Announcement (PMAEA) for NIO mean? How can I use it to improve my trading?

NIOs PMAEA is Predicted Move for NIO is 9% and traders can use it in their volatility-crush and volatility-rush strategies.

4. How do you calculate NIOs PMAEA?

There are multiple factors to consider in the algorithm used to calculate NIOs predicted move:

  • a. Analysing NIOs past stock price performance after earnings announcements.
  • b. Evaluating demand and supply activities around NIOs earnings.
  • c. Studying the companys fundamentals.
  • d. Keeping track of peer companies and the price changes that happen after earnings releases in the same quarter as NIO’s scheduled announcements.

5. What does Predicted Move on the 7th Day mean? How can PM7thDay help me improve my strategy?

PM7thDay is a custom indicator for NIO. The current PM7thDay value is at 19% and it can be incorporated into the Ride-the-wave strategy.

6. What is NIOs next day trading volume?

It refers to NIO’s post-earnings trading volumes and it is not the same as the stocks average daily volume. NIOs next day trading volume is often 5 or 6 times more than the value of its average daily volume. The stock’s next day trading volume is 14,939,108.

7. NIO stock has rallied by 9% after its last earnings call. How can I use this information to my advantage?

Keep in mind that a stock tends to be extra sensitive to market news if it rallies by more than 10% after the previous earnings call. Also worth noting is that a 10% decline after the previous earnings call is a strong indicator that the stock has a lot of bearish potential. In this case, the stock will be extra sensitive to good news which means that it will have some potential upside if good news is released.

8. What options strategy can traders leverage for NIO.?

NIOs current predicted move is 9% which in other words means that the stock price is expected to move by 9% in either direction. If traders sell Put on Weekly Front Options where the strike price is as close as 18% from current stock price, then it is less likely that the stock will hit the strike price. This means that NIO options would be worthless upon expiry thus the trader retains the entire premium. You can also consider adding the 2nd leg on NIO stock by buying the Put option on the same Weekly Front Options with lower strike price. So your margin does not get tied up.

The above represents a good strategy which allows traders to benefit from highly volatile price movements during an NIO earnings call. Caution is necessary when executing the strategy because success is not guaranteed. The ideal scenario would be the NIO options expiring while worthless but in case it drops to the traders strike price, then the trader has to execute a counter-strategy, which in this case would be to buy the stock.

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