(By Costas Bocelli) If you're looking for an edge to help you make better trading and
investment decisions, then you've come to the right place
Because I'm going to share with you a down and dirty
secret that can help you quantify a future
potential move in a stock's price ahead of a defined event.
And after I reveal this helpful tip, I'll share with you a timely
example that you'll be able to follow along with and see how it
plays out very shortly... starting soon after today's market
We're now entering the heart of earnings season, as hundreds of
companies are reporting second quarter (calendar) results over
these couple of weeks.
And chances are that several stocks that you either own or may have
an interest in will soon be reporting too.
The thing about earnings season -- which comes around four times a
year -- is that individual stocks tend to make some of their
biggest one day moves of the year after the results are
And for the average investor, the price action volatility which
normally ensues can be an anxious moment. And why not?
We're heading into a known event (earnings release), but one that
will likely trigger a significant unknown reaction (stock price
But what if you had a tool that could help you gauge that unknown
the earnings release?
Think about how powerful this information could be to you.
Whether you care to act before the earnings release or after,
key price levels will be uncovered to you
that are otherwise
hidden to the majority of the investing public.
In other words, the tool that I'm going to share with you will help
you gauge the magnitude of the stock price movement from the
upcoming market reaction to the earnings event.
For me, that's powerful information to get your hands on, and a
huge edge to discover!
One thing to remember is that it's a tool, albeit a great
one. Like all other forecasting tools, it's not 100%
foolproof. But what I can attest to is that, in my years of
experience, it's been more reliable than not and quite uncannily
effective at predicting the magnitude of price movement.Here's How it Works:
The tool involves pricing an options straddle on the underlying
stock that will be reporting earnings.
It's quite simple. If you can add two numbers together,
you're halfway there. The other half is to properly identify
which straddle to focus on.
A straddle is the simultaneous purchase of a Call option and a Put
option with the same strike price and same expiration date.
The straddle can also be sold, but all we're really interested in
is simply obtaining the market value of the straddle, or the
mid-price between the bid/ask spread.
So let's identify the proper straddle.
With respect to which strike price, we want to focus on the
strike, or the strike price that's closest
to the current price of the stock.
With respect to the expiration date, we want to focus on the
closest expiration date that captures the earnings release
-- the closer the better. The good news is that weekly
options (expire every Friday) are listed on many widely followed
stocks, making it a much more reliable tool.
From there, we simply add the value of the Call option and the Put
option together and we priced the straddle. And that sum just
unlocked the information we're looking for.
The value of the straddle essentially acts like a breakeven around
the strike price we focused on, and since the strike price is
closest to the current stock price, it's also acting as a breakeven
around the stock price too.
Also, since we are focusing on an expiration date that will come
very shortly after the earnings release, the value of the straddle
is essentially a major clue as to the magnitude of the stock price
move that's likely coming after the earnings release.
So the straddle is basically giving you a peek "behind the curtain"
at where the smart money is hidden, for free!A Timely Example:
After the close today, Amazon.com (AMZN) will release their
quarterly earnings results.
Wall Street is looking for $12.89 billion in revenue, which will be
more of the focus than the 0.02 earnings per share bottom line
So how much is AMZN going to move on the earnings release?
My guess is that the stock is going to move 9% on the news.
How do I come up with this? By pricing the appropriate
straddle and taking advantage of the information in the options
Yesterday, I looked at AMZN when it was trading around 216.00 per
The AMZN July 27, 2012 weekly 215 straddle (expires tomorrow) was
trading at 19.00.
It's the proper straddle to focus on, as the 215 strike is close to
the current stock price and the weekly expiration tomorrow of the
straddle essentially is pricing the earnings move in the stock
So come tomorrow, this tool is telling us that the magnitude of the
move should be (+) or (-) 19 points from the 215 strike (shown by
the red dotted line in the chart below). If the price action
is bullish, AMZN should trade around the 234 level. And if
the price action is bearish, the selling pressure should take the
stock down to the 196 level (both target levels are shown by the
Also pay attention in the after hours market and see how the price
action behaves around these key levels -- you may find it very
telling. Management will be hosting their conference call
after the earnings release and during extended hours trading.
While this tool is indeed a reliable indicator in helping you gauge
the magnitude of an earnings move, it does not indicate a specific
direction. But whether it's a bullish or bearish move,
knowing these key levels can be a huge advantage, as you have
discovered exactly where the hidden pressure points are
It's powerful information that you access quick, easily and for
free -- even without having to trade or risk one penny in the
Enjoy your new edge!