How Not To Lose Money During Earnings Season

by CainRedfield
Everyone always talks about whether or not to go long/short before the earnings announcement. Everyone is always thinking about opening a position before the announcement, and I am not here to say this is a bad strategy or a wrong one. I just wanted to talk about a less mentioned strategy that I feel is more reliable than opening positions to “bet” on earnings.
Just wait. Sit on your hands and wait. Wait until earnings are released, and watch Wall Street go crazy over the news. Be reactive to earnings, not anticipatory. In a bull market like we have been in for the last month or so, going short is probably ill advised just due to so many stocks rocketing up and few actually going down a meaningful amount. BUT there are still traders that are overreacting to “bad earnings” or some form of earnings disappointment and selling off stocks. And it’s not that the lowering of the price is unwarranted per se, it’s that it is over-exaggerated.
If there is one thing I’ve learned from trading in the market, it’s that people overreact, all the time. Panic sparks panic and the weak traders that don’t even consider market psychology and their own psychology fall prey to so many different psychological processes that they may not even be aware of. And because of this companies are often oversold due to news events, analyst predictions, and biggest of all, earnings releases.
So the way that I personally like to trade and make my profits around earnings are to watch all the large caps, and some mid caps and how the stocks react after earnings, and if I feel they have been oversold, I will go long when a bottom or support is forming and when the price action has begun to reverse. I’m not always right (still always have stop losses) but I typically find it fairly easy to do well around earnings because humans do tend to fall prey to fear and sell stocks that should not be sold. So by doing the opposite of the market there is a lot of potential profit to be made.
The only point to this post really is to get some people thinking critically about earnings releases and the price action that proceeds them, and instead of only thinking of buying or selling before earnings, start thinking about buying or selling after earnings to take advantage of the downfalls in our own natural psychology and biases.
Earnings season has only just begun, but to give you an idea of places to start, GS is the perfect example of quick easy money after earnings. I sold a credit spread on the 17th and closed for 95% of the credit profit on the 22nd. IBM has also panned out well but I haven’t quite closed that one yet. Looking forward, I’m keeping an eye out on PG and JNJ today, as well as already having opened a position in AXP.
Hope this gives you something to think about, and I’m sure you’ll be able to find many opportunities that I didn’t list and that I may not even be aware of. Good luck!