The market called PayPal's drop 12 hours before it happened

The options market called PayPal's drop twelve hours early.

The financial press told you PayPal got crushed this morning on weak guidance. 

The reality is the market had priced PayPal to drop five dollars the night before the earnings report came out, and that is exactly what happened. The drop was not news, it was math.

Shopify did the same thing. The market priced a fifteen dollar move, and Shopify moved fifteen dollars down before rallying back inside the range. Pinterest played out identically: market priced a three dollar and thirty cent move, the stock overshot in pre-market, and pulled back to land almost exactly on the number by the open.

All three earnings reactions this morning landed exactly where the math said they would. 

You cannot make that crap up.

This is what the headlines never tell you. Before any company reports earnings, the options market collectively prices a number that says "we expect this stock to move X dollars in either direction by the end of tomorrow." 

That number is not a guess but the math of how much real money traders are willing to bet for or against the report, and it gets published every night for every stock that has earnings the next day.

Almost no retail investors look at it, and the financial press never mentions it. CNBC will run "PAYPAL CRASHES ON GUIDANCE" as breaking news while the stock is doing precisely what the options market said it would do twelve hours earlier.

The number has a name: the expected move. 

It is the single most useful piece of information you can have heading into earnings season, and it sits on a free quote screen on every major brokerage platform if you know where to find it.

Here is why it matters. The financial media frames every earnings report as a story about the news, with disappointing guidance and concerning CFO commentary and light forecasts driving the headline narrative. 

None of that drives the actual move, because the actual move was already priced before anyone read the press release.

If a stock moves inside its expected move on earnings, nothing surprising happened. 

The market got it right and the news lined up with the math. When a stock moves outside its expected move, that is when something genuinely unexpected occurred and that is when you should pay attention.

Most retail investors get this exactly backwards. 

They sell stocks that did exactly what the market said they would do, and they ignore stocks that broke through their expected move because the news headline did not feel that scary.

PayPal dropped ten percent this morning while headlines screamed about a crash. The expected move said ten percent the night before. Reality met expectation, and nothing actually happened.

That is what trading on math looks like instead of trading on news.

And on Wednesday, I will show Earnings Flips members exactly how I do it. Last week, we went 4-for-4. Now, that’s unlikely to happen this week. But we only need 1 out of 3 of the trades to work. 

Click here to join, if you’re not already a member. 

To your success,

Don Kaufman