There is nothing more disappointing for options traders than deciding to purchase call or put options (or both) prior to a company reporting earnings in order to capitalize from a large price swing, and then be surprised by the lack of movement in the stock after the quarterly report is released. Everybody at some point has made this mistake. I actually never forget about it. To this day, I continue to chart and log what the stock does post-earnings.
Many investors and traders mistakenly assume that a large market capitalization usually means large price moves for the stock when they report earnings. This is not always the case. These stocks prove that. What's even worse is that these stocks also don't move much in the ensuing weeks and months that follow. This has both call and put holders holding the bag on options that are non-profitable.
The stocks in this article will make you wish you had stayed on the sideline instead of buying pre-earnings. Hopefully, this article will save you some time deciding whether or not you should initiate a position on these. Unless you are implementing a strategy where you can benefit from little movement (that's for another article), steer clear of these stocks during earnings season.
1) Microsoft Corporation (MSFT)
MSFT develops, licenses, and supports a range of software products and services for various computing devices worldwide.
Currently, MSFT is trading at 26.25/share. The 52-week range is $23.65 - $29.46.
|Market Cap:||220.82 B|
A consistent non-performer in terms of share price over the years, MSFT tops my list as one of the worst option trades to make pre-earnings. The stock really hasn't done much of anything for years now, positive or negative, and that's the problem.
Here is a detailed look at MSFT's last eight quarters worth of post-earnings movement. These prices are from the day the earnings were released to the high and low prices the next day. MSFT usually releases its earnings after the market closes on the date given.
|Earnings Date||Pre-Release Close||Next Day High||Next Day Low|
|October 20, 2011||$27.04||$27.19||$26.80|
|July 21, 2011||$26.93||$27.55||$26.68|
|April 28, 2011||$26.37||$26.64||$25.36|
|January 27, 2011||$28.33||$28.93||$27.45|
|October 28, 2010||$25.64||$27.20||$26.48|
|July 22, 2010||$25.07||$26.02||$25.25|
|April 22, 2010||$30.32||$31.58||$30.65|
|January 28, 2010||$28.04||$29.92||$27.66|
From these numbers, we can see that MSFT provides very little incentive to trade. Option premiums and the decrease in implied volatility would completely wipe out whatever small move was made.
The biggest price move in the last two years came on January 28, 2010. Even then, it was nothing significant.
From past experience and based on these numbers above, I highly discourage any option traders to open up a position in MSFT pre-earnings. It's simply not worth the investment.
2) AT&T Inc. (T)
AT&T provides telecommunication services to consumers, businesses, and other service providers worldwide. Its Wireless segment offers wireless voice communication services, including local wireless communications service, long-distance service, and roaming services.
Currently, T is trading at $29.16/share. The 52-week range is $27.20 - $31.94.
|Market Cap:||172.8 B|
AT&T is another company that continually sees little movement after releasing their earnings report. While high on volume, it is low on any substantial swing up or down. T usually reports earnings before the market opens on the specified date.
Here is a look at T and its last eight quarterly earnings price action:
|Earnings Date||Pre-Release Close||Next day High||Next Day Low|
|October 20, 2011||$29.09||$29.05||$28.63|
|July 21, 2011||$29.77||$30.74||$30.24|
|April 20, 2011||$29.44||$30.50||$29.91|
|January 27, 2011||$28.73||$28.25||$27.81|
|October 21, 2010||$28.61||$28.60||$28.09|
|July 22, 2010||$24.92||$25.83||$25.36|
|April 21, 2010||$26.66||$26.75||$26.14|
|January 28, 2010||$25.62||$26.15||$25.29|
If these numbers put you to sleep, it's understandable. Like Microsoft, T is at the top of my list to avoid pre-earnings. In addition, AT&T is one of the most range-bound stocks you will find.
3) Johnson & Johnson (JNJ)
JNJ engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.
Currently, JNJ is trading at $64.12. The 52-week range is $57.50 - $68.05.
|Market Cap:||175.71 B|
JNJ, for being such a powerhouse in the health-related sector, has a very boring stock. This is another stock where expectations will exceed reality, as these eight previous quarters, post-earnings movement shows. JNJ traditionally reports earnings before the market opens.
|Earnings Date||Pre-Release Close||Next Day High||Next Day Low|
|October 18, 2011||$63.79||$64.74||$63.40|
|July 19, 2011||$67.09||$67.22||$66.15|
|April 19, 2011||$60.46||$62.87||$61.80|
|January 25, 2011||$62.22||$61.63||$60.71|
|October 19, 2010||$63.86||$63.67||$62.50|
|July 20, 2010||$59.57||$64.03||$63.06|
|April 20, 2010||$66.03||$66.20||$65.73|
|January 26, 2010||$63.22||$63.01||$62.22|
Among all eight of the earnings listed above, there was only one that I would say provided a large move, and that was on July 20, 2010. To use a baseball analogy, batting .125 isn't going to get the job done. In other words, skip this one around earnings season.
4) Intel Corporation (INTC)
INTC engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds.
Currently, INTC is trading at $23.74/share. The 52-week range is $19.16 - $25.20.
|Market Cap:||124.66 B|
Don't get me wrong, I like Intel as a company. As an options trade before earnings? Trust me, look elsewhere.
INTC is a perfect example of a company who has its quarterly earnings release highly anticipated. How INTC performs can show how many others in the tech space are doing. Coming from experience, I can tell you that this stock just doesn't move like one would expect for such an important company. One possible reason is that INTC has been somewhat range-bound for quite a while now. Just looking at the chart below will show that.
Last quarter, when INTC reported, it saw one of the best price moves for the stock in a couple of years. Please don't be fooled into thinking that this is how the stock usually performs post-report. It's not. Still, let's see its last eight quarters price action to verify this. INTC typically reports earnings after the market closes:
|Earnings date||Pre-Release Close||Next day High||Next Day Low|
|October 18, 2011||$23.40||$24.50||$23.86|
|July 20, 2011||$22.99||$23.88||$22.17|
|April 19, 2011||$19.86||$21.44||$20.94|
|January 13, 2011||$21.29||$21.42||$20.97|
|October 12, 2010||$19.77||$20.03||$19.16|
|July 13, 2010||$21.01||$22.25||$21.28|
|April 13, 2010||$22.77||$23.69||$23.27|
|January 14, 2010||$21.48||$21.40||$20.77|
As the price movement shows, while there have been a couple of decent swings, for the most part INTC is not worth trading options on. Too often, the stock will move only a dollar or barely more on a convincing beat. My advice is to steer clear of INTC. I learned early in my trading career that it was a smart move to do so. I don't want to see others make the same mistakes I did early on.
While past price moves do not always reflect what a stock will do or move in the future, it does give you insight as to whether or not you want to open a position given its history.