By CalvinXTZ, a Cindicator token holder

Thousands of people use Cindicator’s Hybrid Intelligence to make money with cryptocurrencies. This article explains how a trader uses Cindicator to improve his ability to make money in the world of stocks.

If you’re not familiar with Cindicator, go to www.cindicator.com to learn about it. In short, it is Hybrid Intelligence for effective asset management. One of the uses of Cindicator is predictions of market events, including both stocks and cryptocurrencies.

I am sharing this information because I want investors to understand and appreciate the benefit of Cindicator’s Hybrid Intelligence and to give them a straightforward strategy that one trader used to make profits in the world of stocks.

IF YOU TRY THIS STRATEGY … YOU DO SO AT YOUR OWN RISK!

This is not financial advice or a recommendation of any sort. This is a description of what one trader did to make profits. Do not attempt this strategy without understanding stocks, options and Cindicator. Seek out the advice and help of a professional financial advisor before trying this approach. There are no guarantees in trading so if you use this strategy, you do so at your own risk.

The earnings season, when public companies release their earnings, is a busy time for traders and an opportunity to make money. Each earnings report includes vital information about the company’s performance during the quarter and, more importantly, provides guidance about future performance. All of the big companies are followed by investment analysts who study every aspect of a company and provide estimates of the company’s earnings, revenues and such. When a company beats the investment analysts’ expectations, their stock is likely to go up. If they just meet estimates or disappoint with lower earnings, the stock will go down.

If an options trader has an edge during earnings season, he can improve his rate of return.

I used Cindicator’s Hybrid Intelligence to give me that edge during the earnings season at the end of 2018.

Over October and November 2018, I traded Call options based on Hybrid Intelligence for company earnings. I did 23 trades and had a ROR of 33% for those 30 days. During the same time, the S&P 500 was down 5%.

This article describes my approach developed over that period. I will provide updates as I continue the approach in January and February 2019.

What are Cindicator’s Hybrid Intelligence indicators?

Cindicator builds predictive analytics by merging collective intelligence and artificial intelligence. The idea originates from the wisdom of the crowd hypothesis: a large group of individuals on average can make more accurate predictions than a few experts. Cindicator applies machine learning to further increase the accuracy and create ‘Hybrid Intelligence’ indicators. Currently, Cindicator covers over 100 different crypto assets and traditional financial instruments, including stocks, S&P 500, gold and oil futures.

Ahead of every major earnings date, Cindicator posts questions about company performances to 120,000 analysts registered on its collective intelligence platform. Here is an example of a question about earnings:

Example of a question on Cindicator's platform

Cindicator receives responses from the 120,000 analysts and then applies several of its 30+ machine learning models and a neural network, which identifies complex nonlinear relationships between different models. The resulting indicator is immediately sent to holders of CND tokens. Earnings indicators are sent to users with access to the Explorer tier and above.

Here is how indicators look in the Telegram bot:

Example of an indicator from Cindicator

CND ownership level determines indicators received

There are levels (or tiers) of ownership of Cindicator based on the number of CND that you own. The more CND you own, the more indicators … and types of indicators … you receive.

You can get all the details on the Cindicator website.

The lowest ownership level required to receive indicators of earnings reports is the Trader level (200,000+ CND) and the most indicators of earnings reports are sent to the Expert level (700,000+ CND). For the 1st quarter of 2019, there will be more than 40 indicators of earnings reports sent to Expert owners.

You need Expert level to receive enough indicators for this options strategy. It’s a small price to pay for 33% in 30 days (in my opinion, anyway).

How did Cindicator give me an edge?

The key is Cindicator’s indicator ... is there a 75% or higher likelihood that the company will beat estimates? If so, then I buy a Call. If not, then I’m sitting it out.

Traders have been trying to make money consistently based on earnings reports since the beginning of the stock market. But it’s not easy. Most companies are expected to beat estimates. In fact, the long term average of companies beating earnings estimates is 64%, according to Lipper Alpha Insight*. But history shows that you cannot make money buying Calls for every earnings report hoping that the averages will work out in your favor. You need greater certainty about whether a company will beat estimates so that you can carefully select your trades … that’s when you make money.

Cindicator gives me the advantage of knowing the improved-upon opinion of over 100,000 people who follow a particular company and have an opinion on their earnings.

And it worked in the fourth quarter of 2018. Almost 90% of Cindicator’s earnings indicators used in my trading were correct. That helped me trade profitably.

Call and Put options

This article assumes you know how options work. You can find many excellent explanations of options on the web. In brief, Call options give you a right to buy assets at a specific price on or before a particular date. Put options work in the opposite fashion: a Put gives the owner the right to sell the stock at a specific price. You would buy a Put if you believe the stock will go down in price.

The key benefit of using options is the built-in leverage. For example, if a stock goes up by 5%, the value of a Call option might go up by 40%. Of course, this goes both ways and the losses are also multiplied.

I only used Call options in the fourth quarter 2018 earnings season. In the first quarter 2019 season, I will also use Put options (but to a lesser degree).

The options strategy for earnings indicators

I made some great trades over the 30-day trading period and also made some mistakes. The result is a strategy that I will execute in the upcoming earnings season, starting on January 15 2019. Here are some points about the strategy:

Be prepared to do many trades over the earnings season. Use consistent sizing of trades, i.e. risk the same amount on each trade;

Only do trades where the indicator is very positive. I decided that a CND indicator of 75% probability was the required threshold to buy a Call option;

Select the expiration date for the call option that is the nearest date following the earnings announcement. Sometimes it was the same day as the announcement; sometimes it was two or three days away: For the upcoming earnings season, I will experiment with expiration dates that occur during the following week. The additional cost for the additional days might be worth it;

Select the strike price that is AT the money or just a little bit IN the money. Any option that is OUT of the money is usually not efficiently priced: For the upcoming season, I will experiment with strike prices a little out of the money. These can provide a much greater ROR;

This is critical … open the position the day before or on the day of the earnings release. It’s hard to be patient after you receive the indicator from the Cindicator Bot but you should not open the trade until the day before or day of the report. I want the option action to be based on the earnings report because that’s the edge that I get from the Cindicator Bot. If I buy an option many days before the report, the market moves affect the price and can wreck a position before the report is released;

Then watch the stock. If it moves dramatically before the report, feel free to take partial profits or losses by selling part of the position;

Do not let an option expire: close it out by selling it prior to expiration, even if it is minutes before the market close. If the option is in the money and it expires, the option will be exercised and you’ll be on the hook to pay for buying the stock represented by the option. Do not do that. Sell it before expiration.

Examples

Case 1. Let's say ABC corp announces earnings on Wednesday, January 16, after the market closes. The stock is at $36.30. The CND bot provides the indicator on Monday, January 14, saying that ABC will beat the estimate. I wait till Tuesday, January 15, late in the day, to buy the ABC 35 January 18 (FRIDAY) Call.

Then I watch the stock of ABC. If it goes up prior to the earnings release (which is after market close), I will sell ½ of the position to lock in a partial profit. Then I’ll watch it after the report and sell at an appropriate time.

Case 2. Let’s say today is January 11 and I know that company XYZ announces earnings next week, on Friday, January 18, before the market opens. The CND indicator says XYZ will beat earnings expectations. The stock is trading at $93.

I identify my trade: it will be the XYZ 95 January 18 CALL. That option costs $3.25 today. But I do not buy it today! I will wait until Thursday, January 17to do so.

On January 17, I see what the price of the stock is. If the price is now 95.50, the option will be the XYZ 95 Call. If the price is 91, the option will be the XYZ 91 Call.

Closing the trades

A key part is knowing when to close the trade.

I’ve made nice profits by closing the trade before the earnings report is released, as well as closing it shortly after the report’s release. There’s really no rule for this. I have found that taking profits early is a good idea because you never know how the market will react to a good report.

There are occasions when a company beats earnings and the stock goes down. Sometimes the stock goes up in anticipation of the earnings, then craters after beating the earnings estimates. I’ve lost 100% when the earnings were good and beat expectations... but revenue was bad or the forecast for the upcoming year was poor… and the stock went down.

So I believe it’s a good idea to take the profits when available.

Indicator strength

The strength of the CND indicator is key. If it’s below 65% or in the low 70s, I will not do the trade for Call options. If it’s the high 70s and above, I’ll do the trade.

I only used Call options in the fourth quarter 2018 earnings season.

In the upcoming earnings season, I will experiment with Puts based on indicators that are very low strength. For example, the indicator strength has to be below 50% of something like that. The level of strength for a Put trade is to be determined.

Earnings indicator “rules”

To recap the rules that emerged from the prior earnings season:

Use Call options. Use strong indicators that say the likelihood of beating estimates is greater than 75. Select options with an expiration date closest to the earnings announcement. The strike price should be AT or a bit IN the money. Open the position within 24 hours of the announcement (same day or the day before). If there is a big move before the report, feel free to close a portion of the position.

For the upcoming earnings season, I will modify that approach a little bit if I’m using a Put option. And I will experiment with expiration dates as well.

We will see what happens.

Performance summary fourth quarter 2018 earnings season

In total I executed Call options on 23 of the earnings reports and avoided trades for five reports. Of the 23 trades:

89% of the Indicators were correct;

13 of the trades were profitable (56%);

Delivered a ROR of 33% for those 30 days;

During the same time period, the S&P 500 was down 5%.

The linked file provides a summary and further detail.

If you have any questions, I’ll be around to answer those in the Cindicator chat on Telegram.

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