general earnings information...page 1 mastery series trading strategies for earnings season trading...

Mastery Series Trading Strategies for Earnings Season

Trading Strategies for Earnings Season

This Lesson:• General earnings information

• Strategy for short term traders

• Strategy for long term traders

• Strategy for post earnings gap

• Commonly asked Questions

General Earnings Information

What are Earnings?

• Amount of profit a company produces during a specific period of time

• Typically every 3 months

• Typically refers to after-tax income

• Perhaps the single most studied number in a company’s financial statement

• Company earnings are compared to analyst estimates and guidance provided by the company itself

• When earnings and earning guidance provided don’t meet analyst estimates, then typically stock price drops

• When earnings and earning guidance meet or exceed analyst estimates, then typically stock price surges


When do Earnings occur?

• Earnings are made typically on a specific date during earning season

• Earning season is period in which a large number of publically traded companies release their earning reports

• Generally occurs one or two weeks after last month of each quarter

• December – March – June - September

Earning Season

• The “unofficial” earning season kicks off when Alcoa (AA) announces

• Alcoa is first major company to report

• April 12th started this current earnings season

• There is no official end to earning season, but typically ends 6 weeks after Alcoa announces

Earnings Calendar Resources

• There are many websites available to gather list of companies and when they announce

• www.nasdaq.com

• www.earningswhispers.com

• www.marketwatch.com

• www.morningstar.com

• www.zachs.com

• Many of those websites will tell you what the analyst estimates are

• Many will provide historical earnings data

• Some offer simulated predictions

• Best is to find which one you like the best


Strategy for Long Term Traders• Ideal for trader who…

• Intends to hold position through earnings

• Regardless of earnings or possibility of gap down after earnings announcement

• Wants to offset any time loss in value by profiting in short term stock has significant gap down

• Buy a Put that will expire one week after earnings date

• Plan to lose that money – you are buying an insurance policy

• Do not buy in the money – you are paying premium you are expecting to lose

• Buy out of the money put

Strategy for Short Term Traders• Speculative earnings trade

• Best when used on a stock that historically has a significant gap after earnings date

• Best used on higher price stocks

• AAPL AMZN FB GOOGL LNKD NFLX etc

• Implement a Straddle

• Buy a call and a put at same strike price

• Implement a Strangle

• Buy a call and put at different strike price

• Straddle will cost more but have higher value

• Perfect strategies except for implied volatility


Strategy for Post EarningsPost Earning Strategy

• Short term directional trade after earnings report

• Best if stock gaps following earnings

• Best if gap is significant professional gap

• Implement a directional trade based on the type and significance of gap

Gap Analysis

• Rate the earnings gap, to determine if it is a significant gap

• Location of gap

• Short term shock

• Long term change to daily chart

• Volume on gap day

• Price void

Location of Gap

• Where is LOCATION of gap (both open and close of gap day)

• From where is stock gapping and to where is it gapping on chart?

• Is stock gapping over/under a base or consolidation?

• Is stock gapping over/under a pivot or multiple pivots?

• Does a price void to next resistance area exist?

Short term shock & long term change

• What was direction of stock on day prior to gap and 3-5 days before gap?

• Are people who entered the stock right before gap day in pain?

• Did the gap change the direction of long term trend?

• If stock was in uptrend or consolidation, does gap ignite a new move?

• Did stock close at or near high of gap day (gap up) -opposite for gap down?


Volume

• Volume equals commitment

• Does stock have greater than 1 million shares traded per day?

• Is volume on gap day > than average volume?

• Avoid volume less than 1 Million average per day

Price Void

• Does the chart have a price void to next level of resistance or support, depending on direction of gap?

• Look left to see if price action likely to continue or stall

• Hint: if location point is good then void should be there

© 2016 The Financial Puzzle, Inc, All Rights Reserved. The information contained in this program is for educational purposes only and is not meant to be a recommendation for any specific investment. Trading stock, options and foreign currency involves risk. Please read the disclaimer at the beginning of the class

thoroughly and do not trade real money without fully understanding all possible financial outcomes.!


Commonly Asked Questions

Q: What about implied volatility on earnings option trades?

• Leading up to earnings date IV will increase

• Day after earnings date volatility will disappear

• Premium will lose at rate of Vega

• You just have to know this and accept it

Q: Can I fade a gap after earnings?

• Yes but rating gap will determine if that is highs odds trade

• Not all gaps fill especially in short term after gap

• Make sure you go through gap analysis to find the edge

• Professional gaps will continue in direction of gap

• Amateur gaps will often fill and become fade candidates


Q: What if it gaps beyond 2-3x beyond standard deviation?

• These gaps I refer to as Mega Gaps

• They often move little on day of gap as there is a transfer of demand and supply

• Gap often forms in a Doji or indecision candle

• Can be played as a swing either higher or lower over gap day

Q: What do I want to consider for Volume on gaps after earnings?

• You want to see great than average volume on gap day

• This shows institution commitment to the price movement

• Previous 6 months to trade >1 million shares average per day

• If day trading on day of gap want >25K premarket – more the better

general earnings information...page 1 mastery series trading strategies for earnings season trading...

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