Tom’s Weekly Newsletter April 26, 2023

Originally published via our newsletter previously. Subscribe for early access!

Earnings Season is Under Way!

Tomorrow concludes what could be considered the first full week of earnings announcements. How are things faring?

As of mid-week, the S&P 500 is reporting a year-over-year decline in earnings of -6.5% for the first quarter.  This according to research provided and written by John Butters, Vice President, and Senior Earnings Analyst at FactSet.

These number mark the largest earnings decline reported by the index since Q2 2020.  It will also mark the second straight quarter the index has reported a decline in earnings.

More data and research from this analyst can be found at www.factset.com

His research goes on to show of the 30 S&P 500 companies that have reported actual earnings for Q1 2023 through April 14, 90% have reported actual EPS above the mean EPS estimate.

We really only have roughly a week and a half of earnings under our belt, but the number of companies reporting positive EPS surprises and the amount those surprises are coming in at are trending closer to the 5-year average.

Bulls would like to see this strong performance thus far continue to be the case.

Corners of the Market

SPY – SPDR S&P 500 

TLT – iShares 20+ Year Treasury Bond ETF

Take a look at the above chart image for TLT and you will see the yellow arrows emphasizing the past to upward price moves off Darknet B, Bullish signals.

There is a fresh Darknet B signal on the chart.

Is it a guarantee an upward price move in TLT will happen again because the past two did?  No, but if one considers there were two upward moves in a row off the Darknet B, it would be understandable for anyone to expect another.

Whether one does a pure trade on the security itself or does a bullish option strategy is up to them and their broker.

Intriguing that the Darknet B is populating on the chart now at a support are of 104.

UUP – Invesco DB US Dollar Index Bullish Fund

UUP has trade from a support tare to now a resistance area.

A price resistance?  Not so much.  If one accepts the channel drawn in one can then consider UUP trading at the resistance of that channel.

It’s possible UIP rolls over to the support of the channel, which would set an expectation of equities higher since their tends to be an inverse trading relationship between the two.

Should a breakout occur and UUP take out the resistance we would monitor it to see if it holds above resistance for up to a few days to make sure it is not a false breakout.

Should it break out and hold it is possible for higher prices for the US Dollar.

USO – United States Oil Fund, LP

A report or two back we highlighted the consolidation of price that happened after the announcement from OPEC+ they were going to cut production/output of oil.

It was discussed price could go higher, but that the lows of that consolidation would be support. Yesterday USO closed below that support price level.

If things are to break down continued lower prices are expected.  If this is a false breakdown USO’s price would have to trade back up above that consolidated amount of days constituting support, (and a close above that would be more assurance it was only a false breakdown).

If the breakdown continues look for a possible fill of the gap lower.

GLD – SPDR Gold Shares

Option Strategy Education

Here is an educational piece on an options strategy we consider during earnings season.

It can be used other parts of the year, but due to the earnings announcement / news causing pops and drops in a stock and options Implied Volatility fluctuations around these announcements we like the opportunities this options strategy provides.

Selling Put or Call Credit Spreads

A credit spread is created by selling to open and buying to open a same month expiration option at different strikes (different option legs) ON the same order ticket.

The option leg sold is based on where we don’t believe the security will be at come expiration day.

The other option leg bought to open will be wither a strike above or below the one sold, depending on which type of spread, Call or Put.

Our Process with these Credit Spreads:

• We want to sell a credit spread with 3-10 days until expiration.
• We want t position the trade around where we don’t believe the security will be at expiration.
• We want an ROI with an average of 1% per day.  Example: if it is a 5-day until expiration credit spread trade we want a ROI of 5% or greater.

The cool thing about doing these on / around earnings is a company will announce earnings.

Regardless of the earnings (revenue and other reported newsy items for the company) there usually is a pop or drop in stock price.

This usually helps establish the price point used to determine strikes to use for the credit spread trade.

Let’s look at an example, (for educational purposes only – NOT a recommendation).

Citigroup (NYSE: C) recently reported earnings on April 14.

The stock traded higher on that news and if one were to pursue a Put Credit Spread on it based on a belief JPM would not come back down and trade under the low of that day here is what that would look like with pricing on a Put Credit Spread the following trading day.

The details and expectations are also provided on the Risk Graph Page:

The low of the day of earnings was at or near 48.

The spread above is a credit spread with 11 trading days to go before expiration.

One could have sold to open the sold to open the April 28, 2023, $48 Put and on the same order ticket bought to open the April 28, 2023. $47 Put for a Net Credit of $15.50 ($16) per contract.

It is a 1-point wide spread.

The ROI percentage is highlighted above by being circled in purple and it shows a possible 18.34% ROI.

That is an average of 1.67% per day average where we want at least a 1% average per day ROI – the possibility is better than the initial goal.

So long as the security stays above the sold strike in the spread, the spread option should expire, and one should be able to realize the full credit amount as profit.