The biggest question I have received from readers is what are my thoughts on Apple? They have asked my advice on how to play Apple through earnings, my advice “Don’t” instead wait for a trend to emerge after earnings. I captured the move in Apple this year by trading the trend before and after earnings and doubled up with in the money call options at key high probability moments not by holding through earnings. I also side stepped the downtrend by using short term moving averages. Here is why I do not trade positions through earnings.
With the best traders in the world agreeing that risk management should be the #1 priority if you want to be a long term successful trader I do not hold through earnings. I find it to much risk for too little potential gain. I much prefer to play the trend leading up into earnings and the trend after earnings and sit on the sidelines and watch the fireworks go off after hours when earnings are released. Yes, you miss some good pops, but you also miss some spectacular crashes. I am content to get of the way of the earnings train and let the dust settle before I get back in.
Five Reasons I Do Not Hold Through Earnings
- The risk/reward ratio is not appealing to me. In most cases the downside risk is much greater than the upside profits because generally positive earnings are expected and priced in, misses are usually unexpected and create a sudden mass exodus.
- Growth stocks are expected to beat earnings and continue to grow. A growth stock can make earnings and still trend downward if it does not beat earnings by as much as is expected. Company’s have to keep Wall Street happy or they are punished very quickly.
- A growth stock can even crush earnings and still go down. How the heck does that happen? When the stock is already over bought by the majority of money managers and traders then the current holders start taking profits but the stock runs out of new buyers. This is called topping and it generally happens when the fundamentals of the company are still excellent but it simply runs out of enough new buyers.
- I protect my emotional capital carefully and I just do not have the stomach to sit with the out sized risk of an earnings announcement then the stress of the volatile move that follows. I prefer to trade in a flowing stream than try to risk swimming in rocky rough waters.
- It is possible to give back 8 months of profit from a trend in one day if you put on a full stock position into earnings in the wrong stock just one time too many times. Chart Exhibit A below>>