How To Trade The Earnings Season

by Dilip Shaw Date: November 2, 2018 Updated: November 2, 2018

in Stock Trading

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New traders do not know how to trade the earnings season. This post will help you to trade the earnings season. If you do not know when the earning season comes – they fall end of fiscal quarter. This means that earnings seasons fall in January, April, July and October. Corporate earnings are released to the public during earning season – stocks move a lot during this season at least for 5 trading days after the result is out.

If you are a momentum trader you will find earning season to be a great time to enter trades. You can take the benefit of gap up and down in reaction to quarterly earnings reports. Especially the mid caps will give you great opportunity to trade. On top of that finding direction gets easy as well. If the earnings are as per expectation of the market the stock will likely go up, if the earnings are not as per expectation of the market or bad, the stock will go down. You can take trades accordingly.

There are plenty of stocks to trade so even if you miss an opportunity you will get another soon.

Why There Is Huge Volatility During Earnings Plays

Fact is that there are more speculative traders than non-speculative traders. Speculative traders take their positions much before the result is out. They just go as per the market expectation – this is the reason you will see that the stock starts moving a few days before the result is out.

Most of the speculative traders get the direction wrong and pay a price. Stops are hit and the stocks take a different direction. This is the reason sometimes stock does not go in the expected direction of the results.

Please also note that stocks gets too volatile during earnings season because everyone including long term investors, short term investors, swing traders and derivative traders gets active in a stock. Big players also enter here to make some money. Sudden volume increase makes the stock volatile.

What Strategy To Deploy To Take Benefit During Earnings Plays

Since the stock may move in either direction a long straddle may be deployed. A long straddle is when a trader buys both calls and puts to take benefit of the volatility. But note that long straddle may get risky if the stock does not move. Also a drop a VIX of the stock after the result is over may drastically drop the options premium too. This may also cause the damage. Therefore its better to hedge your positions. Still if you want to trade the long straddle then its better to reduce the lot size to take less risk.

Its better to enter stocks that are historically known to make 10% move the result week. Once the result is out these stocks will move 8-10% in one direction and then depending on the situation change the direction, stay there for some time or reverse direction. You can take benefit of this move and make some good money.

Some stocks move more than 10% – keep moving in the same direction for weeks or months. However if you are a trader you must take your profits out and exit the position and then look for another opportunity.

Earning season comes around four times a year, and usually lasts for 2-3 weeks. So you have enough time to make good money during this time.

Other Notes to Keep in Mind During Earnings Season

Actual earnings report doesn’t matter. I’ve seen stocks with great reports sell off completely as soon as the market opens. Some stocks I have seen had very bad earnings report, still zoomed up 10-15%. Its due to speculative trading. What matters is where the stock is going after the result is out. Follow that direction. In most cases if the earnings are good the stock will move up, and down if the earnings are bad. But more than that the reaction to the earnings are important – do not take a contrary view.

Look at relative volume. Relative volume is when stock witnesses sudden volume which is relatively higher than other days. This volume will ensure a big move until it lasts. Once the profit takes and stop loss takes move away, the stock’s volatility will decrease and it will behave normally. Your job should be over before the stock behaves normally. You can check volume easily by going to the following URL:

BSE Stocks with huge surge in volumes traded today as compared to 5-day average traded volume

NSE Stocks with huge surge in volumes traded today as compared to 5-day average traded volume

NSE Increase In Price With Increasing Volumes

Most Active Stocks on NSE

Look at the history of move on earnings. This is a very important factor to consider. Usually it is seen that stocks that move a lot after the earnings report is out will repeat the same after the next earnings report. Infosys for example is such a stock that moves a lot after earnings report, however HDFC Bank and ITC do not move much. So do some research to find stocks that historically move a lot after earnings report and trade in them.

Resistance/Support does not matter. Note that volatile stocks will gap up over all nearby resistance levels to the long-side and will gap down below support in the short-side – therefore its futile to figure out resistance or support for next few days. Some stocks will make a new resistance and support after the earnings report. So just go with the flow and take your profits out. When the price history is broken resistance and support take a back seat.

Do not go for the complete move. A stock may travel 10 or 20% but you should know prior to trading your stops – whether its profit or loss. If a stock makes 10% in a day, it is guaranteed you will not be able to take profit in full move however, it is realistic to capture 3-5%. Do not disrespect your stop-loss, you can however go for the trailing profit booking method if trading in two or more lots – however stops must be respected. It is almost impossible to catch the complete move in a stock.

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Open ZERO Brokerage FREE Share Trading Account - Buy and Sell Stocks Without Brokerage - Set GTT (Good Till Triggered) Orders on System and Forget

Traditional brokers charge a lot for brokerage; however, this broker does not charge anything for stock buying and selling. Also, you can set GTT (Good Till Triggered) order after buying a stock, so that the system can sell the stock automatically at your target price even if you are not monitoring the market. Only 25k is blocked for option selling with hedge. Also, you get a lifetime free account in Sensibull (virtual trading app & strategy builder) which charges Rs.800/-+GST a month. It takes 5 minutes to open an account online. Click here and Open Free Account with Them Today >>

About the author: Dilip Shaw I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.