It is an appealing trade to either buy or short a stock before earnings. You know that the stock will likely make a substantial move and if you are correct you could make a killing. But I can tell you after 10 years of trading the market that it is a really bad idea. It is almost impossible to predict which way a stock will move after an earnings announcement. I have seen situations when a company beats earnings and raise guidance but the stock either stays flat or declines slightly. Conversely I have seen situations where a company misses earnings expectations and lowers guidance and the stock goes up. You never know how the market will react to an earnings announcement so stop trying. It is a loser's game. Most professionals I know will never try to trade an earnings announcement because of this problem. However you will often see small investors try to make a directional call lose most of their money.
I am going to tell you about one of my experiences trading options ahead of an earnings announcement. This occurred in 2008 with Burlington Northern. I don't remember the exact date but it was probably in April-May. I was looking at the chart of BNI which looked very bullish with the stock crossing $100. Anyone who remembers Jesse Livermore's rules knows that this is a very positive signal which usually leads to higher prices. Anyway I was placing a trade in a front month at the money option contract right before the close of trade. By mistake I entered an order for 250 contracts at 1.70 a contract ($42,500) when I only wanted to buy 25 contracts. At the time of the trade I was not aware of the fact that BNI was releasing earnings before the market opened the next day. After I discovered my error I went into a panic because I could lose my entire investment in a matter of seconds. I did not sleep a wink that night. I nervously awaited the earnings announcement which would decide my fate. Burlington Northern announced earnings I believe 30 minutes before the bell. Lucky for me they beat expectations and the stock popped $1.40. But I did not feel any joy, just relief I did not lose everything because of an accident.
But then circumstances began to change--as we got closer to the beginning of trading I noticed that Burlington was only up $1.00--then $.40-and 1 minute before the bell up only .10 cents. Obviously by blood pressure started to boil and the sense of impending doom began to set in. Could things get any worse before I had a chance to get out of my erroneous position? When the opening bell finally sounded the first quote for BNI was up .05 cents followed by the next tick of down .01 cents. Because of the implied volatility in the option, the price of my option fell from 1.70 to 1.00 (a loss of $17,500). My heart was racing and I felt like killing myself for making such a stupid mistake.
The stock continued to fall now down to .38 cents in the opening 5 minutes. At this point I was willing to take the terrible loss and be happy to get the rest of my money back. Then something I can only explain as divine intervention occurred--BNI began to surge higher for absolutely no reason. It eventually moved up more than $3 from the lows to my surprise. I was able to sell my option for $2.85 up $28,750. I was completely speechless and in a state of shock. I could not even speak--all I could do was make weird sounds of euphoria which my parents could not comprehend. It took me over 20 minutes before I was able to actually say anything. I could not believe what had just happened. The next surprise was that Burlington Northern started to fall back down again and closed the day up $.75.
I will never forget this day for as long as I live. I was one of the luckiest people in the world that day. I should have lost almost everything but instead enjoyed a large profit. Personally I would never want to experience the stress that trade had on me. But I survived to trade another day. It was after this experience I decided never to trade a stock before earnings.
Black Swan Insights
I am going to tell you about one of my experiences trading options ahead of an earnings announcement. This occurred in 2008 with Burlington Northern. I don't remember the exact date but it was probably in April-May. I was looking at the chart of BNI which looked very bullish with the stock crossing $100. Anyone who remembers Jesse Livermore's rules knows that this is a very positive signal which usually leads to higher prices. Anyway I was placing a trade in a front month at the money option contract right before the close of trade. By mistake I entered an order for 250 contracts at 1.70 a contract ($42,500) when I only wanted to buy 25 contracts. At the time of the trade I was not aware of the fact that BNI was releasing earnings before the market opened the next day. After I discovered my error I went into a panic because I could lose my entire investment in a matter of seconds. I did not sleep a wink that night. I nervously awaited the earnings announcement which would decide my fate. Burlington Northern announced earnings I believe 30 minutes before the bell. Lucky for me they beat expectations and the stock popped $1.40. But I did not feel any joy, just relief I did not lose everything because of an accident.
But then circumstances began to change--as we got closer to the beginning of trading I noticed that Burlington was only up $1.00--then $.40-and 1 minute before the bell up only .10 cents. Obviously by blood pressure started to boil and the sense of impending doom began to set in. Could things get any worse before I had a chance to get out of my erroneous position? When the opening bell finally sounded the first quote for BNI was up .05 cents followed by the next tick of down .01 cents. Because of the implied volatility in the option, the price of my option fell from 1.70 to 1.00 (a loss of $17,500). My heart was racing and I felt like killing myself for making such a stupid mistake.
The stock continued to fall now down to .38 cents in the opening 5 minutes. At this point I was willing to take the terrible loss and be happy to get the rest of my money back. Then something I can only explain as divine intervention occurred--BNI began to surge higher for absolutely no reason. It eventually moved up more than $3 from the lows to my surprise. I was able to sell my option for $2.85 up $28,750. I was completely speechless and in a state of shock. I could not even speak--all I could do was make weird sounds of euphoria which my parents could not comprehend. It took me over 20 minutes before I was able to actually say anything. I could not believe what had just happened. The next surprise was that Burlington Northern started to fall back down again and closed the day up $.75.
I will never forget this day for as long as I live. I was one of the luckiest people in the world that day. I should have lost almost everything but instead enjoyed a large profit. Personally I would never want to experience the stress that trade had on me. But I survived to trade another day. It was after this experience I decided never to trade a stock before earnings.
Black Swan Insights
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Most of the time earnings come in about where their expected.
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