Ride-the-Wave Strategy – Best for Stock Traders

Ride-the-Wave targets multi-day price momentum following a company’s earnings announcement (EA). With this strategy:

1. Buy a stock one day post-EA if a stock reacts positively post-earnings:
   1. Near the close of trading the EA-day for a pre-market-EA
   2. Near the close of the following day for a post-market-EA
2. Sell-to-close after 7-10 days, or possibly earlier if a desired price target is reached

Similarly,

1. short a stock one day post-EA if a stock reacts negatively post-earnings:
   1. near the close of trading the EA-day for a premarket-EA
   2. near the close of the following day for a post-market-EA
2. then buy-to-close after 7-10 days, or possibly earlier if a desired price target is reached

Important: Ride-the-Wave is predicated on significant price momentum triggered by an EA. The 7-10 day scenario is the maximum trade hold-time. If you see post EA-momentum is halted or reversed by a significant opposite move, re-evaluate your presence in the trade.

This popular StockEarnings screen below will give you a list of stocks that historically exhibit significant price momentum following an EA for the next seven days:

1. Stocks exhibiting positive post-EA price moves are buy-candidates
2. Stocks exhibiting negative post-EA price moves are sell/short-candidates

The screen includes those stocks whose Earnings just came out in last two days.

Screen criteria:

1. Earnings Date Start Date : Current Date + -1 Day
2. Earnings Date End Date : Current Date + -2 Days
3. Predicted Move (Next Day) Max : 7%
4. Predicted Move (On 7th Day) Min : 7%

Strategy Guideline:

1. Buy the stock if stock has reacted positively. Short the stock if stock has reacted negatively (see above).
2. Close the position in 7-10 days, or possibly earlier based on price move.

Volatility Rush Strategy - Best for Options Traders

The Volatility Rush takes advantage of increasing options premiums into earnings announcements (EA) caused by an anticipated rise in Implied Volatility (IV). With this strategy, Buy a Call and Put at-the-money (a long straddle) 2-3 weeks before the EA when IV is lower. Sell the position either (1) the night before the EA when the company announces earnings pre-market, or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.

This popular screen will give you a list of stocks whose Options premiums tend to rise into Earnings. It includes only those stocks whose Earnings are at least two weeks away from today.

Screen criteria:

1. Earnings Date Start Date : Current Date + 15 Days
2. Earnings Date End Date : Current Date + 30 Days
3. Predicted Move (Next Day) Min : 5%
4. Options Type: Weekly or Monthly if that lines up with the two to three-week lead-time for entering the trade

Strategy Guideline:

1. Buy a Straddle at or close to the money two to three weeks pre-EA.
2. Sell the position either the night before the EA when the company announces earnings pre-market, or during the EA day when it announces post-market.
3. Expiration date should generally be the closest expiry immediately after the EA.
4. Straddle price should not be more 60% of predicted move.

Since Last Earnings

Change in share price since last Earnings release.

Why is it Important?

When share has gained more than 10% since it's last Earning release, it tends to over react to minor bad news and give up some gains if not all. So, it contains more downside volatility than upside When share has dropped more than 10% since it's last Earning release, it tends to over react to minor good news and recover some drops if not all. So, it contains more upside volatility than downside.

EPS Surprise (%)

Occurs when a company's reported quarterly or annual profits are above or below analysts' expectations. Here is the formula to derive % EPS Surprice:

Actual EPS - Estimated EPS
------------------------------------- x 100
Estimated EPS

Why is it Important?

Earnings surprises can have a huge impact on a company's stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock's price, but also to a gradual increase over time. Hence, it's not surprising that some companies are known for routinely beating earning projections. A negative earnings surprise will usually result in a decline in share price.

Next Day Price Change (%)

Next Regular trading session Closing price following Earnings result.

For After Market Close Earnings, It is a next trading day closing price. For Before Market Open Earnings, It is the same trading day closing price.

Why is it Important?

Next Day price change is a reaction of Earnings result.