BigT4X Weekly Learning Lesson # 1
Big Earnings pump or dump – how to play it AFTER it happens?
After Earnings it can be so tempting to try and buy the Tank dip…..or short the Moon RIP after the first hour or two of trading.
However, when a stock reports earnings and it drops a lot OR goes up a lot……after that move……it will almost always channel (go sideways) for 4 to 8 (or even 10) Trading days straight (a week or two). I do not have the exact stats, but I can say from experience that this happens probably 85-90% of the time. It does not happen all the time (its not 100% rule) because sometimes you do get complete reversals quickly and playing that move worked! But unfortunately many/most times even those just become bigger channels that get traded up and down.
Too many traders see these big drops (e.g. AMZN, PINS, PYPL, ETSY, etc) and get super excited……and get into plays and then the stock just goes flat and it does nothing…..moving up and down in a channel for a week to 2 weeks while the Option premium burns.
So with that said…..there is really only 3 ways to play these after they happen IMO:
1) Buy the bottom of the channel and sell the top of the channel during this 4-10 day period….make quick gains as it moves in the channel….Day trade. Do not Swing Trade during this time.
2) Write options above the channel (calls)/below the channel (puts) the channel and collect the premium burn during the time it is chopping. Use Credit strategies in Options.
3) Do not trade it and just wait for the breakout either way and trade that breakout upwards or the breakdown downwards when it kicks in 4 to 10 days later.
Understanding this above will help you avoid many option trades that just chop and hit your stops (or expire worthless) after a big earnings move.