By: Tom Gentile
on January 30th, 2024
Sometimes a bad earnings per share (EPS) report is like the measles. If you are a parent and have experienced a child of yours having measles you know that all your other kids are at risk of getting measles, too.
The same for stocks that report bad earnings. A bad earnings report can likely cause a stock to drop in price. If that stock is in a particular sector the other stocks in that sector might also experience detrimental results in stock price as well.
The other stocks might also report a bad earnings number, or they may, at the very least, be taken down in price in sympathy and investors sense that if that company isn’t doing well the sector as a whole may be at risk and not be doing as well.
Rather than trying to find the one stock that is outperforming others in that sector, consider trading the sector itself. The way to do that is to trade options on the ETF.
What is an ETF?
An (ETF) is an Exchange-Traded Fund. It is a batch of stocks in a certain sector pooled together, if you will, that usually has as its goal to track or even outperform, said sector, index, commodity, or other asset class.
It acts similarly in concept to a mutual fund. A key difference is you can buy units of the ETF or even trade options on it during the trading day. Mutual Funds are executed after hours.
Why is this important to us as options traders?
The reason being. I am able to trade the ETF or more specifically options on ETF’s without having the pressure of being able to pick out the one or two in the sector that are working. I can trade options on the whole sector using the ETF that represents it.
Take for instance what’s going on with Semiconductors.
If you haven’t heard we are in earnings season and many decisions are being made about whether to accumulate or sell stocks based on whether the companies that are reporting are meeting, beating or missing earnings estimates.
One sector in particular is the Semiconductors. Stocks in this category are considered technology stocks, but they can be broken down into a smaller sector – semiconductors.
Before I highlight the sector ETF for semiconductors, take a look at what happened to the semiconductor stock KLA Corporation (NASDAQ: KLAC).
Yesterday they reported earnings ‘after market close’ of $6.16 versus estimates of $5.91.
That may seem good as it beats estimates, but what needs to be known is that it is only one part of the story investors care about when an earnings number is released.
They also want to know about their revenue and what seems even more important, the company’s forward-looking outlook on revenue and earnings.
KLAC guided lower on future earnings and revenue and that derailed the stock as it traded down $42.32 points or down 6.6% on the day.
Another semi-stock that reported today in Intel Corporation (NASDAQ: INTC). Based on what happened to KLA what would you think is probably going to happen with INTC? If you thought it could perform similarly to KLAC in that it could beat on EPS and revenue projections, but also guide lower, you would be correct.
They beat AND guided lower. INTC traded down $5.90-points or 11.91%.
Options on the Van Eck Semiconductor ETF (SMH)
With these two semiconductor stocks guiding lower on their next quarter earnings and revenues you may suspect that will continue to happen within the ‘family’ or sector.
Rather than try and hunt down a specific stock that may play out the same way, a consideration would be to trade a bearish option strategy like a Long Put or Put Debit Spread on the SMH.
— Tom Gentile
C1P: Chief 1-Percenter
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