How to Approach Earnings Season

The quarterly earnings season is here again and it’s time to step back for a minute and rethink your strategy.

Many traders believe it’s too risky to trade around earnings, that the reward-risk ratio isn’t worth it. Others, with a higher risk appetite, think this period offers good opportunities for quick gains. It’s a very personal decision.

Markay Latimer, a successful trader with more than 20 years of experience, and Mike Burnick, who has spent over 30 years predicting shifts in the market, have some tips to give to different profiles of investors.

For the Risk Averse

First of all, Markay suggests creating a monthly calendar with all earnings reports scheduled, even the ones from companies you don’t normally trade.

Markay, personally, doesn’t like to hold her trades over the earnings announcements. “Typically, heading to the earnings, I like to play shorter, swing trades, anywhere from three to five days, maybe to a couple of weeks maximum,” she says. 

Markay explains that options tend to be inflated, more expensive, in the week of the earnings, and also in the week after. 

Stocks are more volatile too. “There are always uncertainties around the numbers to be reported. So the share’s prices can go up by a lot and go down by a lot,” she says, adding that it could be necessary to wait days or even weeks until volatility dies down.

According to her, another important thing to keep in mind is that one company’s earnings announcement can also affect others from the same sector. 

“This is something we need to be aware of. Intel announcements can affect Qualcomm and Nvidia shares, for instance, since all three are semiconductor companies. The same correlation exists between FedEx and UPS or Home Depot and Lowe’s,” Markay explains.

A More Aggressive Approach

For those brave enough to keep trading during earnings, Markay recommends some precautions. “If you decide to carry on the trades that you like, put on some hedging strategies or at least take some profit out of your portfolio.”

That way, you have some cash cushion if one of your trades goes in the opposite direction than you were expecting.

If you have a higher appetite for risk, Mike Burnick suggests using the season to look for opportunities with blue-chip companies buying put options.

“[Earnings] can be an interesting situation. We have seen an underwhelming reaction from the market even when some companies report numbers that are not really too bad, which offers some pretty good opportunities for put options,” says Mike.

He points out that we have seen this happen this season already with IBM, Procter & Gamble and Lockheed Martin.

You can check the chart below what happened last week with IBM stock. The company reported its third-quarter results on Monday, October 19, after the market closed.

“Probably these underreactions happen because investors set the bar too high; the expectations were a little too good,” he said, adding these are good examples of situations which can be opportunities for investors to try to take advantage of.

“You should check what happened with the stocks of these high profile companies immediately after they released their reports in the previous earnings season. If they disappointed in the last quarter, the same thing it’s likely to happen again,” says Mike.

Go Deeper…

To try to take advantage of the market, but at the same time manage your risk, Mike just dropped an eBook teaching how to use stops, the “panic button” of trading. You can get your free copy just by clicking here.

Also, Markay will be going LIVE on Wednesday night to talk about the upcoming election. By registering here, you’ll also get a copy of her Earnings Season Playbook immediately.