Trading a stock around its earnings report is like gambling.
It’s exciting. It’s fast action. And if you get the direction right, you can make a lot of money.
But if you get it wrong, then you can kiss your hard-earned bucks goodbye.
For the first 20 years of my career trading options, I loved to trade around earnings announcements. It was fast. It was exciting.
But when I finally took an honest look at the results of my earnings trades, I found it wasn’t very profitable. Oh, sure, I had some big winners – trades that made me 300% or more on my money in just a few days. But I had plenty of trades where I lost 100% overnight, too.
After adding all of these trades together – more than 200 trades over 20 years – it turned out I was barely breaking even. It certainly wasn’t worth the time and effort it took to research all the ideas and put all the trading strategies together.
So, I swore off earnings trades. As much as I enjoyed the action, I couldn’t justify putting in the effort for results that barely broke even.
But in the back of my head, I always thought, “There must be some way to make this work.”
For almost 10 years, I mostly watched the earnings action from the sidelines. Companies would report their numbers. The stocks would make a big move, either higher or lower. And I’d wonder if I would have gotten the direction right if I traded it.
It was painful to stay on the sidelines, thinking about how much money I could have made if I had been on the right side of those moves.
But in the few times during that period that I did dip my toe back into the earnings trading pool, the results were mixed, just like before.
About five years ago, though, I decided to make a concentrated effort to determine if there was a way to get the direction right. Was the market sending clues that I wasn’t seeing? Could I put together a formula, an algorithm that would tell me – ahead of time – the most probable direction for a stock after its earnings announcement?
For four years, I watched the companies of the S&P 500 as they traded around their earnings reports. I noted the volume, the consistency of the moves, the average percentage gain or loss, the option volume in the days before the announcement, the price of the options, the variation to historical premiums, and a whole host of other variables.
Throughout that time, I logged all of that information onto 17 different spreadsheets. Each spreadsheet contains the data for each of the variables. That data helps to determine how important each variable is in predicting the stock’s movement after an earnings announcement.
I then put all of those variables and percentages together and came up with an algorithm for an earnings trading system.
I started trading the system with my own money in April 2016. By April 2017, the system generated 35 total trades. 32 of those trades were profitable. A $1,000 investment in each of those trades created profits of $17,547.
So, a few months ago, I started sharing these trades with my Delta Report subscribers.
We’ve executed seven trades so far. Six of them have been profitable – including an 80% gain in one day on Toll Brothers (TOL), a 100% gain in one day on Guess (GES), and another 80% one-day gain on our most recent trade in Oracle (ORCL).
It’s that most recent trade in ORCL that has me quite excited about the potential for this upcoming earnings season.
You see, on average, the system only generates about two or three earnings trades each month. Sometimes more, sometimes less, but on average about two or three. Last October, though, the system produced eight trades for me.
That’s an active month. And it was hugely profitable, too.
Seven of the eight trades were winners. I made 150% on Bristol-Myers (BMY), 186% on Intel (INTC), and a whopping 400% in one day on Sonic (SONC).
The only loss last October was a 1.32% decline on some put options I bought on Lam Research (LRCX).
If we get similar action this October, then I expect our earnings system trades will be quite profitable. And this season has already started off well… with a fast 80% gain on ORCL several days ago.
That’s a good omen.
If you’d like to know a little more about how the system works, and read what some of my subscribers are saying about it, then click here…
Best regards and good trading,
P.S. If you have any questions, comments, or suggestions for the Market Minute, send me an email right here.
In today’s mailbag, Delta Report subscribers write in with some kind words…
Hey Jeff, I love your work. Sometimes, it seems like you have a crystal ball over there that tells the future (most recently, ORCL and TEVA were both very profitable for me). I have been incredibly happy with your advice.
You have been spot on with gold and silver lately. I had a nice ride up, and I side-stepped the recent down draft, but I am anxious to take another crack at it from the long side.
While I have missed a number of your recommendations (get to the table a bit late as I'm not always around my computer and don't like working off my phone) your conservative approach is proven by the recorded success rate. Look forward each day to your observations and supporting charts. I've made a number of my own selections based on your market direction analysis and had good success.
Truly appreciate your detailed chart analysis.
And readers continue to weigh in on last Monday’s topic – looking back at past trades…
Thanks for the excellent homily on trading using a biblical story for the backdrop! In today's “PC” climate I must say you are somewhat gutsy to even mention Sodom in your Market Minute.
I have been a GOSPEL preacher for 30 years and embarked on options trading early this year. Your running commentary on trading and Technical Analysis has been EXTREMELY instructive and helpful for this novice. I especially appreciate your candor and apparent concern for your subscribers.
The psychology of trading has been a bit of a challenge for me so today's “Biblical Trading Lesson” was right On The Money (“OTM”) for me. 😉
I use that same logic on anything I purchase. My husband buys something and keeps checking to see if he got the best price. A complete waste of time, in my opinion. Love your work.