JD Options Play into Earnings
JD.com, Inc., through its subsidiaries, operates as an e-commerce company in the Peoples Republic of China. The company operates in two segments, JD Mall and New Businesses. It sells mobile handsets, consumer electronics products, and auto parts and accessories; home appliances; and general merchandise products directly to customers through its Website jd.com and mobile applications.band has Earnings on 5.8.2017. The company’s stock is currently trading around $35.14 in a 52 week range of $19.15-$35.56. The stock has been shown on fire over the past year with shares up 35% over the past 12 months. I think that the upside has more to come and JD will pop hard on Earnings. To confirm this signal we will analyze the stocks historical movement record on earnings, the current expectations for movement being priced into the options market, the technical setup, and institutional order flow into the event.
First we will examine the stocks historical earnings performance record. We can see that over the past 8 quarters the stock has rallied 6 times on earnings day with an average move of 4.9%. This does not tell us that the stock is guaranteed to rally this quarter but it does show us that there is a slight bullish bias in the performance of JD on earnings day. This means that as we work through the rest of our analysis will have a bullish bias.
With a sense of how the stock has moved on earnings day in the past we can calculate the expected movement for this quarter. To best isolate the expected movement in JD we will use the shortest dated options that still contain the catalyst event. In this case we will use the May 12th weekly expiry. To measure the market makers expected move we will need to calculate the price of the at the money straddle. We looked at the JD $35 strike straddle in the May 12thweekly expiry and it is implying a whopping $2.00 move.
Straddle for JD prior to Earnings
The straddle is marking around $2.00. This implies an expected move of around $2.00. This implies a move of around 6% by Friday’s expiry. Since this is in line with the stocks historical movement record we know that there an opportunity to put on a good reward vs risk setup in JD ahead of the event With this in mind we can use the expected move to calculate targets for JD.
Upside target = $35 + $2.00 = $37
Downside Target = $35 – $2.00 = $33
With these targets in mind we can look at the chart in JD to see if trend agrees with the bullish bias in JD price action.
Here we can see that the stock is trading above the Ichimoku Cloud and is firmly in bullish territory. One last indication also points to the possibility for a move to the upside in JD.
I think that JD will move higher on Earnings, but I want to make sure I am getting a favorable reward to risk setup. I think the stock will move higher, but NOT too much
Potential trade for JD into Earnings:
Buying the JD May 12th 34-36 Bull Call Spread for $1.00
Risk: $100 per 1 lot
Reward: $100 per 1 lot
This kind of analysis can be used to find setups like this ahead of earnings and other catalyst events.
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