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My Best Earnings Play
Earnings season officially starts next week. That’s when the big banks start reporting.
I can’t wait.
It’s my favorite time to trade. And fortunately for me, it happens four times a year.
I expect this to be a very profitable earnings season for one main reason. Volatility. Stocks have been more volatile this year than any time since the Covid crisis in 2020. That means more profit potential for my earnings trades.
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Even though there are thousands of companies reporting each season, my rigorous screening process filters out around 95% or more of them. Why don’t most make the cut?
It has nothing to do with the company itself – what they make, what analysts expect from their earnings report, the so-called “whisper numbers” … that’s just a bunch of noise to me.
I look at the characteristics of the stock’s options. How liquid are they. i.e., how easy will it be to get in and out of a trade at a decent price? How much premium is available? Are there weekly options? How wide are the strike prices?
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If a stock makes it that far – and most do not – then I’ll construct a trade based on what the stock typically does after earnings. If I’m getting paid enough to make the trade (again, this is usually not the case), then I’ll probably go ahead with it.
I’ll enter the trade right before earnings and exit the next day. In and out in less than a day.
Like I said, next week starts the parade. But there’s one company that I’m looking forward to more than any other. I’ve never lost trading this stock during earnings. In fact, my trades on this stock average a return of 11.8%. That’s $590 per trade for a $5k investment.
But the best part is that these trades are held for less than a day. I get in the afternoon before earnings and I’m out the next morning. In fact, I’m in these trades for no more than a few hours of market trading time.
That means your capital is at risk for less than 10% of market hours, keeping it safe from all the risks faced by the buy-and-hold crowd.
Interest rates, the Fed, supply chains, consumer demand … you name it. The market is facing all sorts of headwinds that scare even the hardiest investors.
But none of that matters if your trade is open for a couple of hours. Overnight trades are immune to what ails the market. All that matters is how the stock behaves after earnings.
That’s why I’ve been able to maintain a winning percentage of nearly 80% over the past five years.
I nearly forgot my favorite earnings play for next week. It’s JP Morgan Chase (JPM), which reports next Friday, October 14, before the opening bell.
I haven’t lost yet with this stock and I’m hoping to extend the streak next week.
Trade Wisely,
Jon Lewis
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