Commission Submission? AMTD FQ4 Earnings Preview

by Dan October 21, 2019 11:58 am • Trade Ideas

On October 1st, following news that the largest online brokers in the U.S. were slashing most commissions rates to zero I had some thoughts on the price action of the stocks (read Broker Choker):

Shares of SCHW, ATMD, ETFC, and IBKWR are getting murdered today, down 11%, 24%, 18% and 9% respectively on the expectation that the race to zero, and loss of commission revenue that “Schwab’s chief financial officer Peter Crawford estimates the commissions fed about $90 million to $100 million in quarterly revenue” on their “current $3.72 trillion” assets under management will be a meaningful hit to their earnings power.

These stocks have since come back a bit in the last few weeks, and investors will be very keen to hear guidance going forward for their new reality of zero cost equity trades. Today after the close, Ameritrade (AMTD) will report FYQ4 results. The options market is implying about a $1.70 move between now and Friday’s close, or about 4.5% in either direction, which is rich to the four-quarter average one-day post-earnings move of about 2%.

AMTD results and commentary will be interesting for the group as they are widely perceived to be on one of the most depenndat online brokers on active traders and commissions as competitors like Fidelity and Schwab have always relied much heavily on asset management fees and net interest margins.

The downtrend that has been in place in shares of AMTD hint to the fact that many market participants saw this move coming, and after the initial shock of the news, the stock has bounced 15% from this month’s low that followed the commission announcement, and is now approaching the gap level from Oct 1:

From purely a technical perspective you might consider that the Oct 1 high just above $38 might serve as decent near term resistance, with risk on worse than expected guidance back below $35 to the early Oct low near $33. On the flip side, the prior $52 week low before the massive gap lower near $41.50, to the gap level near $45 could serve as a bounce and resistance range.

I would be very surprised if guidance would be materially better than investors might think, that said, modeling the loss of commission revenue now is likely to be lean to be more conservative as these companies figure out other ways to recapture some fees from customer balances who are no longer paying commissions.

In the meantime I suspect the stock could bounce if the guidance doesn’t change much, the stock could bounce to the breakdown level near $41. But if the company decides it makes sense to merely kitchen-sink the guidance with the stock at depressed levels so they can beat numbers going forward, then the stock could be retesting mid to low $30s again.

So what’s the trade? 

If I were inclined to play for a near-term bounce, I might consider a Nov call spread to define my risk:

Bullish Trade Idea: AMTD ($37.80) Buy Nov 38 – 42 Call Spread for $1

-Buy to open 1 Nov 38 call for $1.35

-Sell to open 1 Nov 42 call at 35 cents

Break-even on Nov expiration:

Profits of up to 3 between 39 and 42 with max gain of 3 at 42 or higher.

Losses of up to 1 between 38 and 39 with max loss of 1 at 38 or lower.

Rationale: this trade risks 2.65% of the stock price, breaks-even up 3.2% from the current price and offers gains of up to 8% if the stock is up 11% on Nov expiration.


If you think the company will issue disappointing guidance and the stock will retrace a good bit of it’s bounce off of its early Oct lows, then consider defining your risk playing for a breakdown:

Bearish Trade Idea: AMTD ($37.80) Buy Nov 37 – 33 put spread for $1

-Buy to open 1 Nov 37 put for 1.30

-Sell to open 1 Nov 33 put at 30 cents

Break-even on Nov expiration:

Profits of up to 3 between 36 and 33 with max gain of 3 at 33 or lower.

Losses of up to 1 between 36 and 37 with max loss of 1 above 37

Rationale: this trade idea risks 2.65% of the stock price, breaks-even down 4.75% from the current level and offers gains of up to 8% if the stock is down 12.7% on Nov expiration.