How To Trade an Earnings Catalyst "Jump" Event

Trading an earnings catalyst events can be very rewarding (5-20% returns in a matter of minutes or hours) but it is also very risky. Timing plays a key role in whether a trade is profitable or not. Here is our general guideline for how we trade these events in-house.

ENTRY: The system for entry is simple and mechanical. We enter our position at or near market close based on the Trajectory Analysis study completed a few hours prior (SEE THE “ANALYSIS/TRADE PLAN” TAB). For stock trades it’s a often a simple BUY or SELL order based on a preset trade allocation amount. Options trades cannot be traded after-hours and has a different execution strategy..

After the earnings release occurs in the aftermarket, we review the financial data in the release, and see how it compares to our models. Was it a beat or a miss on expectations? What does the forward guidance look like? Are there other important supplemental metrics reported? (such as subscribers, or same-store sales etc). Often the stock price can swing wildly if the release metrics are mixed or there is no clear cut bull or bear bias. We decide if we stay in and ride it, or get out in the aftermarket. This is often a quick decision based on a number of factors.

EXIT:  In the majority of cases where the direction call was correct (short or long) the best time to take profit on a jumper trade is the following day – about an hour after the market opens. If the direction call was wrong, or the release data is mixed, we find it best to get out of the trade quickly in the aftermarket, cutting any losses or taking a small profit if possible. If the actual release numbers meets or exceeds our models, we stay in and ride the profits (short or long). Exiting a trade is really more “art” than “science”, based on experience trading that particular stock, general market conditions and the momentum of the market reaction to the release news. Logic doesn’t always apply and we often err on the side of caution which can truncate profits.

PROFIT/LOSS: Knowing when to take profit or loss on a trade, is an individual decision based on experience and the risk/reward appetite of a trader. This is why some traders can lose money on the same event that another trader profited from. Trading is not easy, and the risk is high and requires experience trading volatile catalyst events to get a feel for how the market might react to the news. Before you decide to trade any event you should understand all the risks associated with this type of trading. (see risk disclosures here)