How to make money on the earnings season
Periodically, the markets experience events that can have a significant impact on stock prices. At the same time, these events provide traders with opportunities to make a quick profit if they choose the right position direction. We have decided to seek for such “market anomalies” and make money on them. One of such events is the quarterly reports of companies or earnings season.
Our idea is as follows:
- We pick promising companies, both in terms of fundamental and technical analysis, that usually have a strong reaction to their reports (7-20% over the last 4 quarters). And they also have their new reports coming out in the next 1-2 days.
- For each of these companies we build an option position for either growth or decline. Most often these are diagonal put or call spreads. If the price moves in the right direction after the report is published, we can make a nice profit. And if our estimates and forecasts do not come true, our risks are limited to $100-150.
If at least 1 out of 5 such companies meets our expectations and grows or falls by 15-20% after the report is released, we will be at least at break-even. And at most we will earn. Accordingly, the better we estimate and forecast, the more often we earn.
Let’s use CELH as an example to show how our strategy works:
A day before the report release, on 28 February (more often we take this time period to avoid holding a position in the portfolio for a long time), we opened a position for growth.
Why did we decide that the stock would rise?
1) The company had a very good fundamental and future outlook.
2) There was a buy recommendation from analysts on 16 February.
3) The price was at the resistance line. We assumed that the price would break the resistance line and with a possible retest from above would go further.
4) When a successful report was released, the company grew by 20% several times.
And how did it turn out in the end?
After the report was published, the stocks rose by 20.44%. So we decided to hold the position for a couple more days. During the following week, the stock rose another 12%. The total profit on this position as of 8 March was about $700.
According to our estimates and already practical positive experience daily selection of such companies and opening of quite simple option structures with maximum loss can bring a decent profit. We’ll try this strategy further and share such cases!
