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That wonderful time is upon us. Four times each year we enjoy the excitement of possible huge successes as our favorite companies release their quarterly results and give us a hint at what's to come down the road. For some of us stock market junkies, it's a little like having Christmas four times a year. Every morning we tip-toe down to our computer to see what goodies have come our way since yesterday's market close.

Last week I wrote an article about the first company with weekly options to announce in April, JPMorgan (JPM) (How To Play The JPMorgan Earnings Announcement). Even though the company exceeded expectations by a wide margin, the stock fell slightly after the announcement and the option positions I proposed racked up nice double-digit gains after commissions. Once again, expectations played a more important role in what the stock price did than the actual numbers announced by the company.

Let's check out some interesting numbers for the big companies who announce next week (source of Whisper Number, Option Volatility and Average Change - EarningsWhispers.com):

(click to enlarge)

The highlighted numbers are the percentage change expected in the stock by the implied volatility (IV) of the options and the Average Change is the historic absolute change after earnings compiled by WhispersNumbers.com. The final column is the difference between IV of the May and April option numbers. The greater this number, the greater the incentive to sell April option premiums while it is so high. Google (GOOG) and SanDisk (SNDK), and to a lesser degree, eBay (EBAY), offer the greatest opportunities for collecting expensive option premiums through calendar or diagonal spreads.

Maybe the most interesting figures for option traders are the percentage change that option prices are predicting by their volatility and the Average Change that has historically taken place after earnings. Option prices for Goldman Sachs (GS) and GOOG are predicting almost double the percentage changes in the stock that historically have occurred, suggesting that calendar spreads (at strikes both above and below the stock price) might be the best bet for those two companies.

For some inexplicable (at least to me) reason, IV of April options (24) for BAX is less than IV of the May options (30) even though they announce earnings just before the April options expire. Since expectations seem to be low for this stock, an outright buy of April 70 calls would seem to be a great move if you were bullish on the stock - they can almost be bought at their intrinsic value (a highly unusual situation just prior to earnings).

For stock buyers, earnings season can bring nice gains if you can figure out in advance if expectations are unusually high (or low) prior to the announcement. History has shown time after time that the level of expectations is far more important than the actual numbers. How many times have we seen a company exceed expectations on earnings, revenues, margins, and guidance, and then watch the stock fall after the good news is out? It is the most frustrating of all investing experiences, and it surely has happened to everyone who has been in the market for more than a couple of calendar quarters.

So what does the table say about expectations? Whisper numbers are higher than expectations for all seven companies, but they exceed expectations by a huge amount for SNDK - the whisper number is 18.7% higher than expectations, the stock has moved higher by a large margin over the last week and month, and it is currently trading at a 52-week high. I think there is an excellent chance that SNDK will trade lower after Wednesday's after-close announcement, but I would wait until late in the day to sell it short because it might continue its upward climb early in the week.

For option players, SNDK's exceptionally high expectation level suggests that it would a good time to buy a put. Buying puts would be a better bet than placing option spreads because option prices are much lower than historical post-earnings fluctuations. However, if the outright purchase of a put is too scary, a good bet might be to buy a May 57.5 put and sell an April 55 put (cost for the diagonal spread, $1.63). This spread would make money if the stock stayed flat or fell by any amount. (I plan to do this trade in my personal account.)

Expectations also seem particularly high for GS (whisper numbers are 9.4% above expectations and the stock climbed more than the S&P 500 last week) although it is trading slightly lower than it was month ago. In my opinion, GS could be a short sale candidate late in the day on Monday, although not as compelling as the short sale of SNDK on Wednesday afternoon. Since April option prices are predicting almost double the average stock price move that has taken place historically, it would be best to sell those options rather than buying them. An ideal spread in my opinion would be a calendar spread at a strike below the stock price - this would have a maximum gain if the stock fell to that strike after the announcement.

The company with the third highest level of expectations is Morgan Stanley (MS), (whisper numbers are 7.1% above expectations) but the stock rose less than the market last week, and has fallen by 5.5% over the last month. Bottom line, there does not seem to be as strong a reason to short MS prior to the announcement.

It is interesting to note that the stock price for every company on the list moved higher last week in advance of the earnings week, but this must be viewed in the context of the entire market for the week - SPY rose 2.3% so the last four companies on the list rose by less than that, indicating that perhaps expectations have lowered for those companies.

Relatively low expectations seem to be in place for Schlumberger (SLB), BAX, and GOOG. All three have whisper numbers barely above expectations, and rose only about half as much as the market did last week. If any of the companies on this list make big upward moves after announcing next week, these three might be the ones to do it.

Earnings season is upon us, and what stock prices for the above seven companies do next week after announcements could very well be precursors to what the market in general does over the next few months. It will be exciting to watch the action.

Source: How To Play The First Week Of The April Earnings Season