c07 JWBT016-Busby October 1, 2008 21:9 Printer: TBD
News Pays 95news the second it was released. Without the right equipment, such a strat-
egy is too dangerous. However, by designing the NewsTraderTMand having
a subscription to a news service, my students and I are able to use a new
strategy and make money in a slightly different way. Successful traders
must be as dynamic as the markets they trade.Earnings Season and How to Use It
Four times during the year, traders get another news bonus—earnings sea-
son. At a specified time during the month, corporations tell the public how
they are doing. The big guys usually do not reveal their numbers until the
NYSE closes. But those who trade after hours still have a chance to trade
the news. Here is what I do to prepare for earnings reports.
First, I visit http://www.earnings.com and check to see which corporations
will be reporting. If you do not know when the earnings data is released,
you cannot trade it. I am only interested in large corporations. By that I
mean those that are the largest on the S&P 500, the Nasdaq 100, or the
Dow 30. Once I find some really big fish that I might want to catch, I do
a little research and determine how the public generally responds to earn-
ings information for these companies. I look at the last few quarters. When
earnings data was released, what happened to the stock price? Did it go up
or down? Was the move large or moderate? I want a stock that generally
has big market moves when earnings are announced. The move can be up
or down, the direction is irrelevant. What matters is that this stock is so
important to the market that the price moves when the data is released.
Finally, I check to see if the company has been meeting expectations
or not.
After I identify the stocks that I want to trade, I generally wait for
the announcement before trading. Like other news events, I do not guess
about earnings. However, occasionally, if I have what I believe to be very
strong analysis on which to judge a probable play, I may trade options for
that particular stock. One such trade was made in the first quarter of 2008
with Apple. The entire market was down and had been trading down for
several weeks. By looking at the yearly open, the monthly open, and the
weekly open, I decided that Apple would likely be a sell. However, I know
that I do not have a crystal ball. Therefore, I did not short Apple ahead
of the announcement. Instead, I bought puts. That allowed me to define
and control my risk while also taking advantage of an Apple sell-off. Once
earnings came out, the stock price quickly fell from the 155 area to 120. I
was loving it! That was a great earnings trade for me. Figure 7.5 charts Ap-
ple’s downward dive. For more information about trading options refer to
Chapter 12.