Earnings season is a time when companies announce how much they have made or lost in the past quarter, as well as talk about their future perspectives.
This can be a very volatile time to be trading as some companies will make big 1 day moves based on the news.
Trading Earnings
Trading earning reports is pretty much like gambling. You ever know exactly how much a company will have made/lost during that time period, and even if you did you would never know how the market will react to it.
I have seen plenty of companies give off great earnings and have their stock fall 10% on the day.
Because stocks can make huge gaps after an earnings report and can be very hard to predict I would not recommend buying or shorting a stock before the announcement. Instead if you want to take the gamble try one of these approaches.
1. Buying Options
Buying options is a much better way to trade these earnings. This way you already know how much you can lose and can position size accordingly.
2. Strangle/Straddle
These strategies involve buying both a call option and a put option on the stock at the same time. This way as long as the stock makes a big enough move in either direction the trade will be profitable.
Both can offer huge rewards if you are right, but even with these two strategies it can be hard to be profitable. Earnings are pretty random. It might gap up, gap down, or do nothing at all, so be prepared to risk the entire amount if the worst case scenario happens.
Avoiding it
History has taught me that the best thing to do during earnings season is probably to avoid being in a stock when earnings come out.
There are plenty of stocks out there, not all of them are going to be announcing their earnings at the same time. There are also many ETFs that do not announce earnings and will not be affected during this season.
If, you are not willing to take the gamble, that’s ok. There are always other trades to get in after all.
