Earnings season for traders is a bit like March Madness for basketball fans—there’s a ton more action to follow, and typically a lot more drama, too.
Case in point, the stock of Fastly (FSLY) captured the market’s attention last week when plummeting more than 30% in the wake of the company’s worse-than-expected Q3 earnings report. On October 13, the stock closed the day trading over $128/share. Only days later it was trading for less than $85/share.
Even more shocking, perhaps, is the fact that after the earnings correction, FSLY shares are still up nearly 300% on the year.
The gap move in FSLY perfectly illustrates how risks and rewards can increase significantly during earnings season. Investors with a long-term horizon, that remain bullish on Fastly, might view the current situation as a chance to buy FSLY at a 30% discount—a Fall sale, if you will.
Alternatively, other investors/traders might view this as a good opportunity to sell volatility in FSLY using equity options. According to research conducted by tastytrade, selling premium after earnings has historically shown attractive win rates—depending on one’s unique outlook and risk profile.
With so much going on these days in the markets, investors and traders may have missed the fact that Q3 earnings season kicked into high gear last week. The first major sector to report was the financial sector which saw companies such as Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM) and Wells Fargo (WFC) release their Q3 financial performance data.
Given the current economic downturn, bank earnings weren’t expected to be strong, and that proved mostly accurate.
Citigroup reported a 33% drop in year-over-year quarterly profits, while Wells Fargo suffered a 50% drop in profitability as compared to the same quarter last year. There were a couple of bright spots, however, as JPMorgan actually beat expectations, and Goldman Sachs reported a huge uptick in trading revenue (Goldman’s best trading quarter in 11 years).
But even the winners were downbeat when speaking about the current business environment. The CEO of JPMorgan, Jamie Dimon, suggested in the wake of Q3 earnings that the economy is still at considerable risk of a “double-dip” recession, and that such a development would cause “considerable pain and suffering.”
This week, two highflyers from the searing-hot technology are set to report—Netflix (NFLX) on October 20 and Tesla (TSLA) on October 21. After such a huge disappointment in FSLY, market participants will likely be watching NFLX and TSLA earnings closely to see if additional cracks have formed in the foundation of the tech rally.
Netflix earnings were actually released on the evening of October 20, and the stock slumped roughly 6% in response to worse-than-expected profitability. Earnings per share (EPS) was lighter than expected, at $1.74/share versus an expected $2.14. The popular streaming service also disappointed on new subscriber growth—drawing only 2.20 million new customers in the quarter versus an expectation of 3.57 million.
Traders seeking to learn more about trading earnings events such as FSLY and NFLX are encouraged to review a recent episode of Market Mindset on the tastytrade financial network.
The hosts use examples from Q3 earnings to provide further context on how earnings reports can impact the underlying price of stocks, as well as implied volatility (i.e. the price of options). Readers seeking to learn more about the earnings trade will benefit immensely from a review of this episode.
Looking forward, some key expected Q3 earnings dates to monitor include:
- October 21, Tesla (TSLA)
- October 22, Intel (INTC)
- October 27, Merck (MRK)
- October 27, Pfizer (PFE)
- October 27, Microsoft (MSFT)
- October 28, eBay (EBAY)
- October 28, United Parcel Service (UPS)
- October 28, Mastercard (MA)
- October 28, Visa (V)
- October 29, Alphabet (GOOGL)
- October 29, Amazon (AMZN)
- October 29, Apple (AAPL)
- October 29, Facebook (FB)
- November 2, Paypal (PYPL)
- November 5, Regeneron (REGN)
- November 5, Roku (ROKU)
- November 12, Disney (DIS)
- November 12, Walmart (WMT)
- November 18, Nvidia (NVDA)
- November 18, Target (TGT)
- December 1, Salesforce.com (CRM)
To track all the important earnings news moving the markets readers are encouraged to tune into TASTYTRADE LIVE, weekdays from 7a.m. to 4p.m. Central time.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to firstname.lastname@example.org.