Earnings Analysis: Attention on $DECK

Editor’s note:  We would like to welcome Park Research LLC @ParkResearch to the CBOE Options Hub family with their look at DECK in front of tomorrow’s earnings report. 

Now just about every trader knows that both $GOOGL and $NFLX blew out of the water. So, which earnings trade has potential like that this week? Most traders might guess that $AAPL or $AMZN might be just that stock. And that’s very possible. However, I believe that this other stock has potential to blow premium sellers more than any other stock: $DECK.

Let’s take a look at some information. As of Friday (July 17), $DECK closed at 72.16. Naturally, I looked at the 72 straddle. The last they traded was at $2.38 or 3.60% move – this move is calculated from 72.16 to break-even to the downside of 69.56. As you can see below (figure 1), that straddle move is described as the light blue filled area. Each candlestick is from each earnings move with 1 being the most recent to 20 being prior 20Qs earnings move (i.e. 5 years ago).

Park 2

Out of the last 20 earnings, at least 19 of them had moved greater than the above straddle price some time during the day. Out of the last 12 earnings, 11 moved in such a way. On average, its absolute max move for 20Qs was 12.02%, its absolute gap open move was 8.20%, and its absolute closing move was 10.47%. Unlike $NFLX, its lowest closing move was 0.7% only 4Q 2014. Therefore, there is a chance that I could lose a lot, but I also stand to gain 190% (10.47%/3.60%) on average closing. It’s a good risk/reward ratio.

I use the Kelly Criterion to make my trade decision in the end and it gave me 86.96% leverage calculation using the closing average of the 20Q historical information. Does it mean I will have 100% guarantee? No, but I sure like my chance of buying the premium. ATTENTION ON DECK! Earnings Reports!

Park 1

*On the side note, I use 1/25 to 1/50 fractional Kelly Criterion for earnings trade since there are still lots of uncertainty involved. In addition, I use the option level 3 (naked margin requirement) for determine the leverage scheme, not portfolio margin to ensure that I don’t overleverage the account.