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Selling
Into Earnings Page 1
(1999) |
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- The
following example shows step by step how
to locate and profit from stocks that have
a tendency to sell off after releasing
their quarterly earnings. This is a short
term trading strategy that utilizes stock
options and should only be practiced by
experienced traders using risk capital.
Less experienced traders can practice this
technique using paper trading until they
have perfected the strategy.
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- 1.
Compiling a List:
The best place to start your search is
with Yahoo’s earnings calendar. This
schedule for upcoming earnings
announcements and is an excellent resource
for investors interested in keeping
abreast of the earnings season. Look for
stocks that are scheduled to announce
their earrings about 4-5 days in the
future. Next: look for stocks that have
had big gains prior to the earnings
announcement and could be due for a
correction (stocks that have remained
relatively flat will more than likely not
have a tendency to make any drastic
moves). Once you have picked out some
potential candidates, go back in time on
your stock charts looking for weakness
near previous earnings announcement dates.
Internet stocks are excellent candidates
for this strategy because they typically
experience huge price swings and most of
them announce very little earnings or
quarterly losses reminding investors of
their over valuation. To visit the Yahoo
earnings calendar click
here.
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- 2.
Tracking the Stocks: Once
you have compiled a list of potential
candidates, place them on a watch list and
track them. Look for stocks that are
experiencing some weakness in the day or
two prior to the earnings announcement. We
wouldn’t recommend entering a trade
prior to the actual announcement because a
surprise number could cause a jump in the
stock and significant loss. You
should be looking for a stock that
experiences some weakness prior to the
earnings announcement and begins a steep
decline on the day following the
announcement. Selling pressure on heavy
volume is a good indication that the stock
is headed lower at least for the next few
days. Do not chase a stock that makes a
huge gap down at the open and then trades
sideways for the remainder of the day
following the announcement.
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- 3.
Placing the Trade: Once we have
located a stock that we think is headed
lower, we would purchase a put option that
is at or in the money with an expiration
date approximately 1-2 months out. In
other words if the stock is trading at 125
in the month of January we would buy the
March 120 or 125 put option
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- This
technique is a short term trading strategy
and will require a watchful eye. After
your trade is placed you will need to
watch the stock closely and sell your put
option at any sign of strength in the
stock. Remember to set cap’s for your
losses and gains and stick to them, do not
get greedy there is always another trade.
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- Example of
this strategy implemented on Yahoo:
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