With earnings season here, it is not only important to pay attention to the stocks that will be reporting, but also to the closest competitors/peers. Some of these are obvious like Deere/Caterpillar, At&T/Verizon, Salesforce/VMware, while others take more digging, but there is almost almost a read-through from an earnings report that will impact a related stock. Sometimes the initial reaction may not be of a large magnitude, but it is worth keeping in mind for when that company reports, as seen recently with being able to predict a blowout quarter from Bed Bath and Beyond (BBBY) after William Sonoma (WSM) posted blowout numbers a few weeks prior.
Often, with options trading, especially close to expiration, if a Company is set to report earnings the front month volatility is juicy, and likely has been bid up in the weeks leading up to earnings, but the sympathy plays often have cheap volatility that allow for some great overnight trades.
Such was the case with Cognizant Tech (CTSH), which was down more than 3% intraday, after Infosys (INFY) reported results and gave poor guidance. Infosys shares tanked more than 15% at a point, weighing on Cognizant (CTSH), considered a close related peer.
In my live chat room I put out a note yesterday on Cognizant (CTSH), because there was very unusual opening buys in April $80 puts with these contracts expiring the next day. Traders were paying $0.30 and pushing up front month volatility 20% to own these puts, more than 4,100 traded on the day in a strike that only held 1,443 puts in open interest, and put volume for the day was 4X daily average. I picked up on the action very early, and then a bit later realized the motive behind this trade....the Infosys (INFY) results.
I already had a bearish outlook for Infosys (INFY) into results because I picked up on some unusual options action recently. On March 25th I put out the following note to clients:
"Infosys (INFY) at day lows on earlier note mentioned and trading 14X daily put volume, with 4,000 May $65/$60 put spreads just bought on the CBOE at $1, reports the Company is under investigation by US Federal Authorities in a tax fraud case. Shares gapped higher this morning after strong earnings from Accenture but have faded sharply now, and IV continues to rise. Recent price action has turned most indicators bullish, but anytime fraud is noted there is potential for major downside. The $39B provider of outsourcing trades fairly rich at 22.3X earnings, 6.8X sales and 103X cash flow, also coming off of a major disappointment last quarter in its report. The Company is also exposed to Japan with staff there, and could see results impacted in the coming quarter. Shares also have a head and shoulders top pattern forming if they fail here."
Shares climbed the two weeks after that into earnings, but lost all that and more with today's move closing at $63.20 but touching near $61. I figured the report would be bad with wages rising in India, and shares were already trading at a pricey valuation.
The Cognizant (CTSH) puts that were bought for $0.30 traded up to around $1.50, a 400% gain for an overnight trade, and quite a clever one.
Always pay attention to events that will not only impact a certain stock, but the stocks that trade in a high correlation.
I like this website to find correlations, although you can also use FinViz to find related Companies, http://www.market-topology.com/index.php?option=com_impactopia&view=friend&Itemid=&symbol=infy&discr=100&above=20&below=1&etf=0&timeFrame=1y
Hopefully this provided some insight and can make you some money one day looking for these type of opportunities. These are exactly the kind of scenarios with unusual options action that I provide daily to subscribers.
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