John Deere $DE reports 8/15 before market open with traders having 2 days to position for a move.  DE has a history of reporting before the market open. An earnings historical table is below:

Fundamentals:

As seen DE has a history of beating EPS and revenue estimates.  Fundamentally I believe DE to be attractive to money managers on a valuation basis noting its Forward P/E (9.22), PEG (1.14), P/S (0.94).  Also DE has a 2.32% dividend yield that is  historically stable and raises when adjusted.

Industry Competitors:

1) CAT – reported 7/25 beating estimates & noted best quarter in history, lowered guidance noting depressed construction activity due to Eurozone & China but housing coming off lows & improving.  Stock performance gapped up then sold off but has recently recovered that selling and is up near 9% off pre-earnings close

2) CMI – reported 7/31 beating EPS missing revenues, maintained guidance and cited strong profits despite weakened global economy.  Stock performance gapped up with retracement next day and is up near 12% from pre-earnings close

3) AGCO – reported 7/26 beating EPS missing revenues, maintained guidance and cited strong sales of tractors and farm equipment.  Stock performance gapped up then sold off to pre-earnings close and hasn’t looked back being up near 10.50% since that close.

Summary :

My opinion these companies continue to look attractive on a valuation basis including JOY who hasn’t reported.  These names are moving together off lows which can be attributed to the agriculture story (see $CORN).  I believe that the hot agriculture story is going to stick and I have a bullish outlook on these names going forward as they all have been hit on the global growth story but have been revived by the agricultural story and I look for the momentum to continue with some pauses/basing.

Earnings Moves:

Summary:

• Avg move is 2.18% with a 5% outlier when removed results in a 1.70% move
• Avg Augen StDev move on earnings into the open is 1.33 with no real outliers
• Current StDev move is 0.95 taking that multiplied by avg Augen StDev move is (0.95*1.33) 1.26pts
• 1.26pts would constitute a 1.59% move which is below both averages calculated; but the 90 day volatility is at the bottom of its range

Volatility Analysis:

Summary:

• IV data not able to pull up for 11/23/2011
• Two huge moves of IV to the upside 8/17/2011 & 2/15/2012 with both moves being over 2.25% downside moves
• My opinion no real edge in selling the strangle as reward is not worth the risk, rather take a directional bet
• Avg IV move is 22.72%, removing the two outliers is 11.66%
• I also took into account the next month IV shift (for Calendar Spread purposes) and those two outliers also effected the next month with the avg IV shift being 4.93% and when the outliers were removed 2.30%

Charts and Technicals (notes on chart)

• Long-term symmetrical triangle engulfs short-term symmetrical triangle
• Recent buying volume above 65% average volume (50sma) with lows being at the 50sma and retakes now flattened 200sma
• Long term support/resistance line around 79.25 , near Fri close, with next resistance area at 82-84 (3-5% from current close)

Trade Ideas:

Given the recent reports of industry competitors and their price action I am bullish on price action going forward for DE.  Even though it has a history of continuously beating estimates and a miss would end that trend, I believe the long-term fundamental story of agriculture will trump any earnings miss (as seen in industry competitors beating EPS missing revenue).  On a volatility perspective, IV is at a historic low here so recent volatility analysis could be overtaken (expected 1.26pts / 1.59%).  I am concentrating on the 82.5 strike as I am expecting a gap to the 82-82.5 level so a minimum of a 3% move.  There are three bullish trades that I like, accepting a 100% loss:

1. Aug 80/82.5 Call Vertical current price 0.89
2. Sep 82.5 Single Call current price 1.14
3. Sep/Aug 82.5 Call Calendar current price 0.64

The Vertical trade is advantageous if we see weird fluctuations in IV as noted above by those 2 outliers.  I prefer these trades when I am not sure on how IV will react.  The Single trade is most risky in my opinion as it will suffer from a drop in IV (even though small) and has the least reward:risk if we do get to that 82 level.  But it also benefits from continued upside.  The Calendar trade has IV risk.  I went and backtested those trades where the IV gained on earnings and the calendar was a loss/small gain even though it went in the right direction.  In both instances they were down moves over -2.25% and if I put a Call Calendar on in the direction of the move it was a loss and a Put Calendar was a small low double/single digit gain (overall disappointing considering the direction was right).  But the calendar trade works great if we take out those 2 IV outliers with a near 80% gain on a touch of 82.

***All data compiled from free resources to include : thinkorswim desktop platform, estimize.com, streetinsider.com, finviz.com

Priceline reports 8/7 after market. Looking at prior 7 earnings we can see that PCLN has a history of beating EPS and revenue with the 2 revenue misses being narrowly missed compared to the beats verse the consensus.

Competitors TRIP and EXPE have already reported with both moving in opposite directions (EXPE up and TRIP down). Both companies were cautious going forward marking weakness in Europe. Along with mostly beating expectations, PCLN has had a history of raising or maintaining guidance so if they cite weakness and lower guidance I believe shares will take a sizeable hit.

The next table shows the moves after earnings with other data I use to look forward for an expected move.

From this data I like to take the average Augen StDev move (1min after the open after earnings release) and multiply it times the StDev move before earnings. In this case:

• 2.78 * 15.31 = 42.56 is my expected point move based on prior price action and volatility movements into earnings and this is what I will use to structure an options trade (preferred being verticals, butterflies, iron condors, and ratio spreads).

Also looking at this, we have some higher Augen StDev moves as high as 5.94 and mostly above 4. I will use this to measure some extreme moves:

• 5 (splitting between 5 & 6) * 15.31 = 76.55

This would be an extreme move representing a 11.5% move which would trump any other move with only one being close (8/4/2011 saw 11.23% move). But as stated above, if they miss or the forward guidance disappoints then I believe this number is achievable.

The next table shows implied volatility (IV) moves and looks at the ATM straddle to see what the option market is pricing (I prefer to use the bid for purposes of the worse possible fill). On the far right the green cells represent a win selling the straddle and the red cells represent a loss)

The above data tells me the following:

• the ATM Call IV into earnings is the lowest we’ve seen (subject to change tomorrow)
• the straddle bid is 2nd highest we’ve seen, implying that the options market is currently pricing in over a $51 dollar move
• there has not been favorability in buying/selling the straddle
• 11/8/2010 straddle sale was a close win with a 8.34% move with ATM volatility at 101%
• 2/27/2012 straddle sale was a loss on a 7.31% move with ATM volatility at 78.76%
• With current ATM at 77.05% I believe selling volatility for a non-directional trade would be disadvantageous, so I will be looking for a directional trade.

Now I will look at the chart for price targets.

Priceline has some nice whole number support and resistance levels which I have labeled at (note these are general areas and not to the dollar):

• 550 – breakout point from prior range (not shown on chart)
• 600 – gap support area
• 625 – gap from 2/27/2012 earnings, acted as support level
• 680 – resistance area of current range
• 700 – resistance area & where Upper Band of 3rd St Dev Bollinger Band comes in

With the information that I have I am looking to take on a directionally bearish position into earnings taking advantage of a volatility drop.

Trade idea: Long the Weekly Aug 610/630/650 Put Butterfly, currently 2.15.

The risk profile below shows the trade after the earnings release with what I believe the trade will look like taking into account time and volatility drop. Even though on average the ATM call has dropped 68.17% (noted above) I chose to use a drop of 35% due to what I noticed in recent trades. When there has been a large move, in this case expected over 40pts, there tends to be a bid in volatility causing it not to drop as much. I tested other dates and the drop was around 30-40%, so I used 35% in this case. Remember this all approximations and what to expect. I also am showing two other butterflies, one 10 points lower and the other an upside with selling the 700 calls (both being 20-wide).

The price slices show expected breakevens after the release, at expiration, and at current price 663.93.

Note on the price chart the highlighted Blue Box. These are my containment levels after the release to which I believe the trade would still be at breakeven or slightly above after the release and the trade could be taken off or kept depending on intraday price action.

PCLN does have a fairly wide option spread so if you do put this trade on you will have to come of the mid-price more than usual. One technique I like to use with the thinkorswim platform utilizes the hash marks on the order tab. I found if I go to that first hash mark (where blue arrow is pointing) I have a better chance of getting a good fill in a quicker amount of time. In this case instead of getting the trade at 2.15 it would be 2.55, which I would still have no problem entering at.

All data used comes from StreetInsider.com and features within the thinkorswim platform. Not all data is completely accurate as I sometimes round the IV percentages but nothing to where the results would be extremely skewed. Also all data is used for approximations and nothing is guaranteed. This is to show the reader my personal thought process going into an earnings trade and what I look at and the data I can use to structure a trade. Unfortunately all the time used to structure a trade can still result in a complete loss.

Please note that going into earnings a trade structured like this should be taken only if you are willing to lose 100% of your investment. These trades are considered high risk and should only compromise a small amount of your overall portfolio.

Going into next week we have MasterCard (MA) reported Aug 1st before the market so traders have 2 market days to prepare for any move.  I chose to do an analysis on MA due to its higher price and availability of weekly options.  Going into earnings we can see that over that past 6 earnings cycles MA has a history of beating expectations on a EPS and revenue basis with the exception being the last 2 quarters with MA missing on revenue expectations.

Going into earnings I only trade options as you can structure your risk more favorably than trading stock and you can even structure it accepting a 100% loss on the play in accordance with your portfolio risk.  Below is a table that I structured for MA of its 6 previous earnings cycles:

This data takes into account statistics into the close the day before it releases earnings and the next day after it releases earnings 1 minute into the open.  I use this data to interpret the expectations going into earnings, the volatility, and the results if volatility was a better buy or sell.

Going into earnings I look at what the straddle bid is currently 19.05 and I look at the StDev Move and the Augen StDev move average.  In this case I decided to leave out the one outlier of 2/3/2011 as we saw a small move and the other data will structure my risk more favorably.

So in this case I am going to take the current StDev move (6.82) and the average Augen StDev move 1min after (2.41) and multiply them and I come up with the number 16.44.  So this tells me that the current standard deviation move priced multiplied by the average move that has happened is 16.44 points.  Right now the straddle is pricing in a 19.05 move, so I am thinking to sell volatility.  But also I want to go and look at the earnings historical move and whether volatility was a buy or sell and right now it looks like a coin flip as the straddle mid price 1min after the open favored a sell 4 out of 6 times with 2 of them being close whether you could get filled near the mid or not.  Also I consider only one of the earnings to be a blowout (11/02/2011) which was to the upside.

Going to the chart I can see that we have some decent support and resistance areas near 390 and 445.  I also like to look at the 3rd Standard Deviation Bollinger Bands for magnitude of a move, both currently showing approx. 5-6% away from price.

So taking into account all the information I am looking to sell volatility into earnings.  While I believe the straight straddle sell is expensive and maybe not available to all customers I am looking to sell the Iron Condor.  This is effectively the same idea with a capped loss.  Unfortunately the reward is not as much either but I like the fact that my risk is capped.

My trade idea is selling the 395/400/460/465 Iron Condor at 1.09.  The credit received will be $109 and the max risk $391.

Now that I have an idea I want to forward test the expectations of selling volatility based on the average implied volatility (IV) drop we have seen in the past.  Looking back at the table we can see that the average ATM call IV change has been 37.46%.  The only problem that I can see now is that historically the ATM call IV has been a lot higher with it really starting to kick in when MA started doing weekly options for earnings (11/02/2011).  So with current ATM call IV being around 43.50% I want to go back and look at a recent move where the ATM call IV was around the same.  This brings me to the IV drop back on 8/3/2011 and it dropped around 22%.  Now I will use this looking forward:

Plugging in the data it shows me that my breakevens at the end of the earnings day would be 406.64 to the downside and 456.64 to the upside and if my expiration breakevens were hit would create around a 100% loss on the credit not the total position.

Looking at this forward data and based on prior volatility and price moves I really like the Iron Condor here, especially over a straddle sale as I am more comfortable with the risk in case a blow out happens like we saw 11/02/2011.

In summary, remember these are approximations on forward looking data and all  I am doing is trying to guess based on recent data and how the chart structure looks into creating  the trade plan.  With earnings it is important to remember that anything can happen and no matter the historical moves or homework you do on the current trade, it can all go to hell with one number or some words during the conference call.  Structuring the trade round your risk tolerance is the most important factor.  Also note I have not taken into account any prior news, forward looking news, product information, or just overall company performance as I believe there are too many factors and a lot more people qualified for that.  I get lost in the fundamental reasons and just pay attention the numbers.

**Also with MA the option spread is fairly wide so if trading spreads be patient or come off the mid-price a little more than you usually would.