I am e-mailed on a frequent basis and questioned during presentations on a particular topic. I realize a majority of traders already know this, so prepare to snore away.

Let me start by painting a picture. I present a lot of potential trades in various sessions to explain concepts. Let's say I throw an example out to the group and it is discussed for a potential trade. Within moments I will receive a question, or a few follow up e-mails later on that mention the next upcoming earnings date and will ask..."Would you get out before earnings?" "Would you hold this trade over earnings?" "Would you not make this trade?" "Would you stop deleting these e-mails and answer my question please?"

Joking aside, let's examine the logic behind this question. What is an earnings announcement? This is when a company announces if they were profitable or not over the last quarter, and if so/if not what were the details? Management will give investors insight as to how business is doing, and future forecasts. Once you understand the impact these announcements have, you understand the stock will MOVE. If the company is losing money, or gives a negative forecast, the stocks can drop substantially. If the company is making money, or gives a positive forecast, the stock could rise substantially. Analysts also give you a benchmark as to what they expect the stock should do as far as a profit or a loss. If the stock does better or worse than the expectation, this will have an impact on the price. Many traders claim that earnings drive the price of the company. Obviously if the company is making money their value will rise. If they are losing money their value will fall.

Now let me get to my conclusion. Before you ask someone whether or not you should hold your trade over earnings, ask yourself why would you sell...and why would you hold? Do you really feel that you know what earnings will bring? I think we can poke around and find out what wall street is expecting earnings to look like, but DO YOU KNOW HOW THE MARKET WILL REACT? I have seen the market react negatively to good news and positively to bad news. Bottom line...I don't think that you will be able to anticipate what the price will do.

Knowing this, do you want to hold a trade or have money invested in an outcome that you cannot control? Ultimately you determine what risks you take. If you are a long term oriented investor, you might not put a lot of emphasis on this event. If you are a short term trader, you might be scared to death of it. As a short term trader, I do not hold directional trades over earnings. I will place certain trades around earnings, but will not hold a single call or put over this announcement since I have no idea what will happen to my profits, nor what the outcome will be. I dismiss ambiguity as a trader.

As I warned, many already realize this, but hopefully this may have helped those that were not sure. By the way, no e-mails asking if you should hold over earnings. Just kidding, you guys rock.

Be back shortly

Posted by Option Addict on 9/27/2006 at 4:30 PM | Permalink