What a week we have had with earnings, many plunges. Even for the markets beloved Apple. When talking heads on CNBC straight talking about “buying opportunities” and “investors” start trying to put an earnings miss into “perspective” we are generally in trouble. What many of the big call option bettors and longs in Apple didn’t understand is that a sure thing is many times the most dangerous of all things. Stocks do not rise magically based on fundamentals and value they rise from the buying and selling action of the current buyers and sellers in the market. Prices are set by the price where they agree to change ownership not a calculation of value and future worth. If traders do not believe they will make money and the odds are that they could lose then they sell. If a stock is already over owned by the majority of buyers we start running out of fresh buyers.
Here are ten more good reasons not to hold through earnings:
- It is very difficult to truly manage risk in after hours with the sudden price gaps.
- It is not trading it is gambling to hold through earnings, the odds can not be measured at all, anything can happen.
- Stocks can still fall even if the company beats earnings, the market could sell the news since it is already priced in.
- You can give back months of hard earnings profits if you hold your same position size into earnings.
- Shares of a similiar industry can be punished like $PCLN was due to $EXPE earnings.
- $CMG almost dropped $100 in one day after earnings.
- It is not worth the emotional and mental stress both leading up to the earnings and after the event.
- Option strangles and straddles are difficult to play due to the incredible efficiency of the option pricing model and implied volatility.
- Near term options held through earnings can become almost worthless after earnings when implied volatility is removed from the price.
- Holding through earnings gives you a chance to have huge losses, this is not how successful traders make money.
With not positions on today I was away from the computer and on my phone. This is my view after looking at some stocks that had reported earnings. Amazing so many fell so far: