The Power of Correlation: A Better Way to Trade Earnings Season

[Image] The Power of Correlation: A Better Way to Trade Earnings Season Unless you’ve been living under a rock, you’ve probably noticed that the market is deep in the throws of earnings season… Additionally, this week’s Federal Open Market Committee (FOMC) meeting — where the Fed decided to hold interest rates where they are — is adding another ingredient to the volatile soup that is the U.S. stock market. And while earnings season can present some beautiful trading opportunities, most traders approach them all wrong. WARNING: If you blindly gamble on earnings plays, you’re gonna get destroyed. My nearly 30 years of experience as a professional trader have taught me to look at earnings trades uniquely. Wanna start trading earnings season like a Wall Street pro? Keep reading and I’ll show you how… The Most Important Word During Earnings Season For me, earnings season’s hidden secret lies in one word — correlation. When Stocks A and Z operate in the same sector, and I see Stock A is making a big move following an earnings call, I’ll often look to trade Stock Z instead. This is a trading strategy I’ve developed over decades — something I call the ‘Earnings Sympathy Play.” Let me explain… I love trading correlated names on earnings rather than directly betting on the stock reporting. I get much cheaper options and the stocks in the same sector can still move quite a bit. Why is this the case? Because the correlated names have lower implied volatility (IV) than the company that’s currently reporting. And they often move in a similar direction. So, by buying options on the correlated names, I give my trades more potential upside (and less upfront risk). Let’s look at some examples… How Correlated Trading Could’ve Helped You Yesterday Yesterday, Advanced Micro Devices Inc. (NASDAQ: AMD) reported stellar Q3 earnings and the stock surged as much as 9.4% intraday. Meanwhile, the call strikes that moved into the money were unsurprisingly up big… The AMD 11/3/23 $104 Calls gained as much as 150% overnight. Not too shabby… However, the risk/reward betting on AMD calls before the report wasn’t great. Typical of earnings season, the ‘implied move’ of the AMD at-the-money (ATM) straddles was large, dampening the potential gains of the call options. Consider another idea… If you thought AMD was gonna surge today, what if you had purchased calls on a correlated name in the semiconductor industry? For example… You could’ve bought calls on Micron Technology Inc. (NASDAQ: MU) as a sympathy play to AMD. MU moved up 4.11% yesterday, far less than AMD, but the at-the-money MU calls were up considerably more than AMD’s. MU 11/3/23 $69 Calls were up as much as 250% yesterday. That’s 100% more gains than similar contracts on AMD. Again, this is all about the implied moves. The market makers know that earnings cause massive swings, but they don’t price the correlated named accordingly. This gives traders like you and me a huge opportunity to profit off of earnings moves without subjecting ourselves to insanely high IV. A Correlated Trade Idea What have I been saying since the beginning of this ultra-volatile fall season?! You’ve gotta stay nimble, ready to switch your strategy up whenever the market calls for it. So, while yesterday might have looked ultra-bullish for semiconductors … I’m now leaning bearish on the sector. The FOMC meeting and earnings season are coalescing, which has led me to a completely different trade idea on MU… Let me explain… I think semis were squeezing yesterday for two reasons: - AMD’s strong Q3 earnings report… - The Fed’s decision to keep interest rates steady… However, I don’t think these factors are strong enough to keep MU’s bid alive. The ‘Burn Notice’ panic that fund managers were feeling yesterday — causing them to drive up MU’s share price — should disappear by today. That’s why I alerted MU 11/10/23 $69 Puts yesterday afternoon… Plus, the MU chart is nearing major resistance in the high $60s, which I believe to be the top of the stock’s current intermediate range. Take a look… MU YTD daily chart — courtesy of [StocksToTrade.com]( Closing Thoughts All this to say, you should be watching MU closely into the end of this week. And if you’re considering buying options before an earnings report, think about trading a correlated name (rather than the company reporting that day). As always… Stay Street Smart, Jeff Zananiri P.S. Did you miss the live FOMC event yesterday? You’re in luck… [CLICK HERE NOW]( to see how pro trader Rob Booker and I are using precision timing to take advantage of this unusual market volatility!   66 West Flagler Street STE 900 Miami, Florida 33130 United States [Facebook]( [Twitter]( [Instagram]( [YouTube]( [Click Here to Unsubscribe]( **Our gurus teach skills others have used to make money. Any results displayed are extraordinary and are not typical and will vary from person to person. For more info read our [Earning Claims Disclosure]( About: Making money trading stocks takes time, dedication, and hard work. My goal is to teach you how I have succeeded in the market, but you may not achieve my results. Remember, there are risks involved with investing, including the potential loss of money. We are strongly committed to protecting your privacy and providing a safe & high-quality online experience for all of our visitors. We understand that you care about how the information you provide to us is used and shared. 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