This week we’re making a different sort of play, thanks to the rubber band effect.
Jump on this one fast.
Here’s how you can profit by playing a post-earnings option trade in reverse of a move that just took place…
Tyson Foods (NYSE: TSN) shares soared 10% on Monday after the company reported mixed earnings.
Investors apparently chose to ignore the big earnings miss, focusing instead on the top line beat and positive guidance.
Do you think it will hold?
When companies report earnings, volatility spikes. Those big swings are what make trading earnings with simple call or put options exciting and potentially very profitable.
What about after the earnings event?
For some stocks, whenever there’s a spike in price up or down after earnings, there’s a snap back in the opposite direction.
Astute traders can profit from this rubber band effect by playing a post-earnings option trade in reverse of the move that just took place.
For Tyson, that suggests buying put options.
If one assumes a 50% retracing of the 10% gain, a 5% loss in value from current levels, current December expiration options would double in value.
The fact that the company actually missed profit expectations makes a reversal move all the more likely.
Valuation should help, as well. Shares are expensive relative to expected profit growth. Analysts expect the company to grow profits by 10% in the current fiscal year ending September 30, 2016. With shares trading for 15 times prior fiscal year earnings, Tyson shares are, indeed, expensive.
Typically, a snapback rally takes a week or two to materialize.
In this case, and based on prior moves in Tyson, shares look for a rubber band bounce to happen rather quickly.
Don’t delay in placing a put option trade on this one. The sooner, the better.
Tyson is a defensive stock, not a technology momentum stock.
A 10% move in shares in one day simply isn’t sustainable.