Behind the Scenes

Our two potential trades failed to materialize this week because the two companies in our database that reported earnings — Nike and Accenture — failed to meet our parameters. As I said last week, I will never stretch to make a trade. Parameters must be met in this trading service before we pull the trigger.

Our next opportunity arises on October 13, when Delta Air Lines is scheduled to report. After that, we have Netflix and then a long string of earnings results that will begin flowing in.

In the meantime, I want to give you a small example of how we make our trades, based on the backtesting that analyst Chad Shoop and I have been conducting since late last year.

Our System’s History of Success

On May 12, Nvidia, a tech giant that makes graphics processing units for the video-gaming market, reported earnings that beat Wall Street estimates by 12%. That day, the shares gapped higher by 10%.

Both of those data points exceeded our parameters and, in doing so, triggered a trade. In this case, the database told us to trade the options immediately. (In some cases, we buy immediately; in some cases we wait up to three weeks.)

We bought the July $41 call options on May 13. We closed half that position on May 18 with a 50% gain. As part of taking that early profit, we immediately set a stop-loss on the other half for a 10% profit. We do that to ensure we capture a gain on the rest of the position, just in case the shares sell off or the market goes crazy for whatever reason.

In this particular case, Nvidia continued to push higher — and that prompted us to continually ratchet higher our trailing stop-loss. That underlying stock, after climbing sharply through June, took a short respite later that month. When the shares fell briefly, it triggered our trailing stop-loss, and we were taken out with a 200% gain on the second half of our position.

Had the stop-loss not been triggered, we could have potentially ridden our Nvidia call options to a gain of 488% by the time the trade closed on July 12, two months after the company’s earnings report.

I mention that for two reasons:

  1. We will never own a position longer than two months from a company’s earnings release date. Once we start into the third month, the shares begin to come under the influence of expectations for the upcoming quarter.
  2. While most of the time we will be stopped out somewhere along the way, there are instances when we will see substantial triple-digit gains when a stock reacts to earnings the way Nvidia did.

To be sure, not every trade has worked out as well. Some generated lower returns. Some booked us losses. That’s just the nature of Wall Street. But so far, Chad and I are happy with the results. Remember, this system averaged a 42% gain every 12 weeks in our backtests and real-time paper trades. The only challenge is, as we’ve seen these last two weeks, waiting for companies to meet the parameters we’ve set for them in our database, because they have historically shown a tendency to move in one direction or the other, based on their earnings report and the market’s initial response. But I expect that holdup will change in coming weeks as the bulk of our earnings-reporting seasons gets under way.

Until then, do you have any questions for me about the system or making the trades? I’d like to use the quiet weeks ahead as an opportunity to answer any of your questions so that you’re comfortable making the first trade. Please send your emails to me at earningsdrift@sovereignsociety.com.

On that note, I’ve looked in the mailbag recently, and I’ve seen a few questions about the availability of a text-alert service. We won’t have that service available for this beta-testing stage, but I plan to release the text alerts when we roll out the fullEarnings Drift Alert service down the line. In the meantime, just remember to keep an eye out for any subject line titled “Trade Alert.” I’ll always send you these trades as soon as the opportunity arises.

Until next time, good trading…

Jeff Opdyke
Editor, Earnings Drift Alert