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Earnings: How Trade Them Correctly

We are in the middle of earning season, a very exciting, profitable and yet, intimidating time for traders.

Companies that beat analysts' expectation, perform better than expected, has higher number of subscribers, etc... are the big winners during earning seasons.

The positive surprise generated by the good earning reports can oftentimes reverse a multi-month downtrend, push price to break stubborn resistance levels and even reach and move above record highs.

The gains produced by these positive reports can give traders and investors double digit percent returns in just a few trading days, and sometimes even just in matter of hours.

The image below shows NVDA chart, a semiconductor company who's stock price tripled in a few months, thanks to three positive earning reports. During that period, NVDA stock price moved from $65 level to $160 (+152%).

On the other end, if the company misses their earning targets or analyst's expectations, the effect on price action can be quite devastating. Time after time we have seen stocks trending up for many months, and then all of a sudden they suffer a huge drop as a result of negative earning reports.

Just look at FSLR, a solar company that was trading around $70-73 level at the beginning of 2016. Then came a series of negative earning reports and a year later, price was down to $25 (-66%).

So how can traders and investors take advantage of these huge profits? And also how can they protect their capital from suffering large loses?


Stock price can move up, down or sideways. Earnings provide volatility, meaning uncertainties. Following earnings, the uncertainties of price moving in one direction or another are amplified.

Depending on your trading style, the approach taken different from trader to trader. The difference depend on what their trading style is: day trading, swing trading, position trading and investing.

Day Trading

The major concern for a day trader is how to take advantage of the volatility, and the potential movement (up or down), that a positive or negative earning report provides.

They trade right at the opening; they watch price movements during the first 7-8 minutes after the market open, and if support is confirmed, they jump right in, looking to make 5-10% gain (or more) in just a few hours. Once price reaches, or comes near, resistance they're out.

This trading style is very profitable but also kind of stressful. The good news is that they don't worry about earnings, news or anything happening after the market closes. Before the day is over, they close their position(s).

Swing Trading

For swing traders, earnings tend to provide added risk more than anything. The uncertainties that earnings bring into the equation, generally are not worth the risk for swing traders.

Since swing traders are looking to make 10-15% gain over the course of 2-10 days, holding positions during earnings only increase their risk of potentially losing money. If earnings miss expectations, or have a negative impact, this could significantly undermine their effort to make that 10-15%.

Generally swing traders will not hold positions during earnings.

They close the position before earnings, and re-enter the position right after the earnings (one, two or three days later) if the conditions are right and price has resumed a more predictable pattern.

Occasionally they will enter a position on the day of the earnings, just to take advantage of the price fluctuations, with the option of getting out of the trade on the same day, if price moves against them. Basically, they will trade the earnings just like a day trader.

Position Traders and Investors

This is the population of traders that can be most affected (positively and negatively) by earnings.

They buy and hold stocks for extended periods of time:

  • position traders hold from a minimum of 30 days, to a maximum of one year;
  • investors have long-term vision, so they might be holding their position for three, five, ten years and even longer.

How can position traders and investors, or anyone else caught in the middle, trade the earnings? Let's explore a few possibilities.


1) Sell Option Spreads to Hedge

Selling options will help mitigate your risks. Since this strategy puts a cap on how much you can make and lose, you will be limiting your profits if price shoots to the moon. However, you will also limit your risks of exposure and protect your capital, if price moves down.

Based on your price projection, below are some of the most basic and yet effective option strategies to trade the earnings:

Bullish Scenario

Bearish Scenario

  • Short Call Spread
  • Naked Call

Neutral Scenario

2) Hold a Small Position or Close Your Position Before Earnings

Before the earnings report are released, either close your position completely, or simply hold a small position.

Bullish Scenario

If after the earnings release:

  1. Price starts moving up, re-enter the position or add to your small position.
  2. Price gaps up significantly, wait for a pullback. If support holds and price starts moving up again, re-enter the position or add to your small position.
  3. Price moves up, but then pulls back and breaks below support, close your small position.

Bearish Scenario

If after the earnings release:

  1. Price starts moving down, close your small position. You can also initiate a short position.
  2. Price gaps down significantly, wait for it to pull back up and test some upper resistance. If resistance fails, close your small position. You can also initiate a short position.
  3. Price moves down, but then pulls back up and moves above resistance, re-enter the position or add to your small position.

Good Trading!

Trading Risk Disclaimer

All the information shared is provided for educational purposes only. Any trades placed upon reliance of SharperTrades, LLC are taken at your own risk for your own account. Past performance is no guarantee. While there is great potential for reward trading stocks, cryptos, commodities, options, forex and other trading securities, there is also substantial risk of loss. All trading operations involve high risks of losing your entire investment. You must therefore decide your own suitability to trade. Trading results can never be guaranteed. SharperTrades, LLC is not registered as an investment adviser with any federal or state regulatory agency. This is not an offer to buy or sell stocks, cryptos, forex, futures, options, commodity interests or any other trading securities.

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