Let’s consider an earnings play in Apollo Education Group (AAPO). We know that over the last two years the mean move on earnings has been 11.5%. We have seen it move up as much as 28% and down by as much as -10.3%. It has beaten expectations 5 out of 8 releases and 2 out of the last 4.
Looking at the price chart below, I can see no discernable trend. But what I do see it that if it breaks this key resistance at $28.70 , it has a great chance to fill the gap created from least earnings report up at $31.78. Looking at the implied volatility, we can calculate the expected move through April of $31.75. So, the technicals give us one piece of bullish evidence and the past performance paints a slightly bullish bias. If paid enough odds to take this risk, we considered the April 29/32 call spread for $0.60. This gives us a risk reward of 4:1! (distance between strikes ($3) less what we paid in premium ($0.60) divided by our max loss (0.60). ($3.00-$0.60)/$0.60 = 2.40/0.60 = 4.
I have made the case that this proposition is far from a “coin flip” and constructted a signal that will pay us 4:1. That is maximizing leverage.