Hi Traders,

It's earnings season, and people often ask me how I approach it. My answer: trade to it, not through it. Then GO HARD afterward.

Earnings themselves are essentially a crap shoot. I could give you the results of every company reporting and you might be right on the move 60 percent of the time. Good can be bad, bad is almost always bad, and it really comes down to guidance.

So what do I do? The same thing I did on the floor.

Leading into earnings, there's typically huge demand for options. This is why implied volatility (IV, the market's expectation for how much a stock will move) tends to go up into earnings. IV rises not because the market makers goose the number, but because there's demand from the public to buy options:

This is a chart of Tesla (TSLA) options. IV will go up and down heading into earnings, but in the weeks leading up to the report, IV climbed from the low 40s to near 50.

Then look what happened on Thursday: demand for options flips on its head. But it's different this time.

Think about going to a show or a ball game. Getting in is pretty easy because people arrive at different times. For a Cubs game I might show up for batting practice while a bunch of people partying on Clark Street don't show up until the third inning. There's a one-to-two-hour window for fans to enter the ball park. That's the same as people buying earnings options over weeks and days.

Now think about the end of the ball game. We all sing 'Go Cubs Go' and then there's a rush for the exit. Everything gets clogged and it can take 20 to 30 minutes to get out of the park. IV crashes the same way: everyone tries to dump their options after the announcement at once.

But I'm different. At the end of the seventh inning, I always order a beer (assuming I'm not driving). I don't touch that beer until the ninth inning. Then I relax in my seat and finish the beer after the ball game ends. Guess what: I just waltz out of Wrigley Field.

I do the same thing with options. I let everyone else rush out, crushing option prices, and once they've left, I walk in and scoop them up at what is almost always too cheap a price. At the point I start buying, the market makers typically realize they've gone too far and they start rallying option prices. We call this the U.

Here is what it looked like in Intel (INTC)'s last earnings call:

You can see the U from last July. We're likely to see the exact same thing with Intel options this time around.

Here is what I do: I analyze the stock movement, pick my direction, wait for the bottom to hit the options, then I step in and scoop them up just as they start to reflate.

We all saw how well Intel did on earnings, and this one might take a few more days to see IV drop because the move was so wild. But as the stock settles, we should see option prices drop just like they did in Tesla:

IV has dropped, but it has a lot further to fall.

Here's the best part: this past week was just the appetizer.

Reporting this week over a two-day span is about 25 percent of the market cap of the S&P 500 and over 30 percent of the Invesco QQQ Trust (QQQ) in five stocks: Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Meta (META) on the 29th, and Apple (AAPL) on the 30th.

That doesn't include Exxon Mobil (XOM), Chevron (CVX), and many other huge names reporting this week.

Here are the top five names reporting Tuesday through Friday:

Almost all of these will follow the same U pattern we see in just about every stock's options as they head into earnings, report, and the market reacts.

If you'd like to join me in this trade, you can join me in the next Special Situation post-earnings play. I'm going to be trading at least seven stocks, and the last couple times I've done this trade I'm 11 out of 12. Join me here.

The One I Love

Last week I told you I liked Intel. I think I was pretty right. This time around I am looking at credit markets. Yes names like OWL are hot garbage, but we through the baby out with the bath water. Names like BX and KKR got sold with the cruddy names like AGNC and OWL. I think there is more upside in these names. The one that I am seeing the most bullish flow in is KKR. I like buying it.

The One I Hate

Sandisk has had such a crazy run. The stock has bumped against 1000 dollars a share but failed to eclipse it. Earnings are on the 30th, I have trouble imagining their earnings being able to meet the price that is baked into the stock. This one is going to be a case of Icarus where the stock was flying but maybe flew to close to the sun.

Mark Sebastian