What’s Going on Everybody?

It’s earnings season, and that’s exciting, is it not?

On this morning’s I’d Trade That, we spent the whole show on how you trade it and where you put your feet.

We’ll get to Domino’s Pizza (DPZ), and the two people I’m waiting on before I’d hold that stock past today, but stick with me on one sentence first.

You can call the beat. You can call the direction. You can still lose money.

If you’ve traded options around earnings, this has probably happened to you, right? You did the work, the company did well and the stock went up. Then you opened your account and your trade was down.

And some part of you wondered if the whole thing is rigged. Markets aren’t rigged. You were trading an instrument whose price already contained an assumption, and nobody taught you how to read it.

So the question you’ve been asking is wrong. It’s not, “Will they do well?”

The question you have to ask is, what does my trade cost, and what outcome does it need? The first one’s about the business, and the second one’s about the price you’re paying. You can be completely right about the business and extraordinarily wrong about price.

Check out the replay below or read on for the wrap up.

Before You Pay for the Gap

So our rule up front, okay? We don’t trade options into a print. Trade it right up until 4:00 the day before they report, I don’t care, but don’t be paying into the other side.

And if you are trading into the print, use put spreads or call spreads, whatever direction you’re heading. We’re basically not in the room for the gap.

Why not? Remember, there are three different sets of expectations, and most people only know about one of them.

People know consensus, right? That’s the published estimate, and it’s already in the price. Management guides low enough to step over the bar, so when you hear 80% of companies beat, don’t get too excited.

The second is the stock. If something rallies 20% into a print, the good news is partly in that price already, and buyers have already bought.

The third is options, and that’s why we’re here, right? Options tell us what the market’s charging for a move, and a lot of people don’t look.

Implied volatility is just a price. It has no direction at all, and high implied volatility simply means the market’s charging a lot for not knowing what’s going to happen.

That’s it. Now add a scheduled earnings report, and the seller knows the stock might gap 10% and isn’t taking that risk for free.

The instant that number prints, the uncertainty is gone, permanently. The premium collapses, often within seconds, and that’s volatility crush.

Look at a straddle, where people buy the call and the put at the money. You pay $8 on a $100 stock, and you need an 8% move just to break even before costs. If it’s worth three bucks after the print, you’ve lost five.

These outcomes are brutal. It’s not worth the squeeze.

So why would a company grow earnings 1,000%, beat consensus and still sell off? Because it happens. It happened in this market within the last month, whether the guidance came in weaker, the margin came from something one-time, nobody was left to buy it, or people just expected it.

If all of this sounds boring compared to what you see elsewhere, good. The exciting version funds everybody else.

The Morning After

So what do you focus on instead? You wait for what’s known as drift, you trade VWAP after a reaction, and you use insider buying as an anchor. Those three things.

Post-earnings drift means returns tend to keep going in the direction of the surprise for weeks after the announcement. Remember, a large fund can’t build its position in one session, so it buys for days. It’s not a promise.

Look at Domino’s. DPZ is our worst stock in the S&P 500 in terms of relative momentum, and it reported this morning with same-store sales down. It’s always darkest before it’s completely black, right?

On yesterday’s data, implied volatility percentile sat at 99%, so options were about as expensive as they get all year around this report. That’s why you play Domino’s with VWAP, the volume-weighted average price. It’s the cleanest read on a massive overreaction.

The bands ran from $274 to $313, a $40-wide move, with VWAP at $293. Heading into the day, the five-minute showed oversold on RSI and MFI, my two momentum gauges, and the 15-minute sat right at the second standard deviation line. That’s a place to bid.

I typically tell people to just hang out for the first 15 minutes. But if you break quickly above VWAP coming out of that oversold combination, that’s a five-, 10-minute trade right at the opening bell. $287 took you to $303. Huzzah.

Tomorrow we re-anchor to the earnings announcement to see who bought after the big event. If we drop under it in the next couple of days, that’s continuation to the downside, and if we keep moving higher, we trade around that line.

Show Me the Form 4

Waterproof asked in the chat if I’d want to own Domino’s. I’m probably not going to step in unless somebody at that company buys their own stock.

Domino’s has gone from $550 to $289. Is it a good bargain? Is the executive buying the stock?

I like Domino’s, by the way, and the weekly chart makes me very sad. But there’s no real floor yet, and this may be retesting $250 relatively soon.

When was the last time an executive bought their own stock at Domino’s? It’s not a good number: mid-2023. Over the last five years, there’s been $1 million in buying against $58 million in selling.

So I want to see Russell Weiner, the CEO, get out there and buy, pal. Same for Kelly Garcia, the chief technology and data officer. That’s going to be my clue.

I asked Cathie Wood this question. In 2022, I wrote a Modern Trader article where I went through every single holding in ARK and found $1 million in insider buying from one board member over five years, against $42 billion in selling. Most of that was Elon Musk selling Tesla, but I asked very simply: if the executives aren’t buying these unprofitable tech names, why are you?

So we pay attention to the beaten-up, blown-out names and look at the earnings levels. If we get a CEO or CFO buying, particularly over $100,000, we set up to sell put spreads below where they bought.

We’ll anchor Domino’s back to its print tomorrow at 9:20 AM ET. Come trade it with me.

I’d Trade That,

Garrett Baldwin