Wednesday, August 4, 2010

Rhyme and Reason

Turns out my MasterCard pre-earnings analysis turned out to be spot on ... or not. Despite its historical bias towards rewarding volatility buyers and utter lack of volatility bid-up into earnings, MA still chalked up a win for volatility sellers. This go around the absence of any pre-earnings excitement turned out to be justified as the earnings reaction was a veritable snooze fest. With a mere 1.9% gap down, the reaction turned out to be the second smallest move over the past two years. I've updated the earnings table originally displayed in the For Everything Else There's MA post (click image to enlarge).


After all these musings on MA earnings, traders (including myself) may be wondering if their is really any value added to all the data mining. After assessing past earnings announcements and the volatility landscape, is one's ability to forecast the earnings move really improved? Well, consider the alternative. Suppose instead of the aforementioned educated approach, you simply flip a coin before earnings. Heads you buy volatility, tails you sell.

I gotta say my logic and reasoning rules in favor of the educated approach. Despite the fact that each earnings is unique and seemingly unaffected by past announcements, it is possible to identify a stock's normal price and volatility behavior around this event. I would submit this knowledge of the norm would improve one's chances of traversing the often treacherous earnings season.

Adam Warner of Daily Options Report posed a similar question in his cleverly titled Captain Kirk Dance Party Time. In regards to the accuracy of option expectations pre-earnings he states:

"So no, option players get it right at times....and also get it wrong.....and also pretty much scratch. It's a full range of outcomes.

Why bother looking then?

Well, I do like to see if we get some sort of pattern. Are high profile names getting "overbid" for the most part? If so, it presents some opportunities to net short options ahead of reports."

I like the analysis. The key is lies in identifying some sort of pattern. If one finds a discernible edge, exploit it. If things seem completely random, go golfing.

For related posts, readers can check out:
GOOG, What Volatility Bid-Up?
AAPL Options, A Steal or Too Rich?
The Relativity of Volatility

1 comment:

Investment newsletter directory said...

I would like to comment about penny stocks . Their are many stocks trading on the new york stock exchange that once traded around five dollars on nasdaq.