Three Ways to Trade Notable Earnings Coming Up
It’s common even for the most experienced traders to be caught off-guard on earnings reports rocking the street. Notable earnings reports are often accompanied by unexpected volatility that can magnify profits or losses in equal measure.
The increased flow of information coming with earnings reports can be overwhelming as they tend to trigger mixed reactions among investors. Being on the lookout and preparing adequately ahead of such market-moving events increases the chances of profiting from these events that come once every three months.
Similarly, the volatility that accompanies earnings reports can be disruptive as it often causes prices to gap either up or down. Likewise, the volatility that accompanies notable earnings reports can be turned into profitable trading opportunities.
Trading Notable Earnings Coming Up Strategies
The fact that even the most experienced traders feel shy trading stocks during earnings announcements calls for extreme caution. While nothing can guarantee one will be on the right side of a trade when a report hits the street, there are smart approaches that balance risk and reward, allowing one to profit from the extreme volatility synonymous with these events.
Don’t trade
Even if you feel ready to take on the ups and downs that come with earnings reports, at times, it is wise to just refrain from trading. At times, trading earnings report is usually not worth the risk given the wild swings that come into being, making it difficult to determine price direction accurately. Staying away from the ebbs and flows that come into play with notable earnings report guarantees capital protection.
Likewise, some traders, even the most experienced, wait for the dust to settle to open new positions after a notable earnings report. Once the dust is settled, it becomes pretty much easier to identify the direction price is moving.
In contrast, placing a trade heading into notable earnings coming up amounts to speculation or gambling. This is partly because no one knows the kind of numbers a company will post, the guidance it will issue, and how the market will react.
Therefore, there is nothing wrong with being patient. This would be the perfect time to watch the patterns that come into being on increased volatility. You will always have a better chance of building wealth by not trying to time the market or make trades based on short-term metrics such as notable earnings coming up.
Try Using Options
If you must trade notable earnings coming up, it would be wise to leverage the power of options. These financial derivatives have proved extremely useful in balancing the risk-reward heading into highly volatile sessions such as earnings seasons.
Given the uncertainty around the upcoming earnings report, it is always important to closely examine the options market activity. Options are ideal derivative tools to place bullish bets on the market or hedge existing positions against the potential downside.
While planning to trade notable earnings, the first step with this strategy is to analyze options to identify any unusual activity. The focus should be on volume data, which would signal to which direction the market expects the price to move after an earnings report.
Likewise, look for a call or put options with a current volume in excess of the average daily trading volume. Secondly, compare open interest to ascertain if the current volume exceeds the prior day’s open interest.
Similarly, it is important to analyze and determine the magnitude of the anticipated move. Options appreciate whenever volatility increases. Likewise, implied volatility can signal the direction the overall market is expecting the price to move.
The last step in using options to trade notable earnings coming up is determining the move’s direction. For instance, put and call options with the same volume and the same price and expiration date might signal the overall market betting on volatility.
Consider the Market Maker Move Indicator
In addition to using options to place trades ahead of upcoming earnings announcements, using the Market Maker Mover indicator could help shed more light on the ideal trades to place. The indicator is most useful during earnings as it offers perfect price entries and exits. Options traders can also use the indicator for strike selection.
The indicator is designed to show how big move traders are pricing heading into the earnings session. For instance, if the indicator was to price at 4% prices move, there is usually a high probability of a stock rising by more than 4% after stocks earnings announcement.
In addition to showing the kind of trade to place, the indicator can also be used to place take profit and stop-loss orders on trades. If the MMM is forecasting a 5% move, a trader can decide to place a stop at a level that is 4% under the current value ahead of the earnings report.
Bottom line
Trading notable earnings coming up should never be an all-or-nothing endeavor. Never try to look for a big score on an earnings report that you don’t know how it will come out or how the market will react. If possible, the best way to trade earnings is not to trade at all.
However, if you must trade notable earnings coming up, it would be wise to leverage a proven strategy that balances risk and reward. The use of options is a sure way of protecting oneself from the unexpected swings that follow such events.