In the third week of October, companies will begin reporting third quarter results. We’ll find out which companies are set to soar and which are poised for a crash.
For long-term investors, earnings are always a good time to look at their stocks and analyze the companies’ performance over the last several quarters. Then, long-term investors can determine whether it makes sense to continue holding the stocks.
For shorter-term investors or traders, earnings can supercharge their returns. These reports can get the party started as stocks take off on better-than-expected results.
And this earnings season is especially critical. Between COVID-19, interest rate and analyst cuts, and the coming election, the divide between successful and unsuccessful companies will be larger than ever before.
So will the opportunities to profit…
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Trick or Treat
For perspective, consider what happened last year at the end of a normal earnings season.
On December 5, 2019, retailer Express (NYSE: EXPR) popped 28% in one day after reporting surprisingly good results. It went on to climb a total of 60% higher in four days over the closing price before earnings came out.
And shortly after, Ciena (NYSE: CIEN) jumped 20% in one day after reporting better-than-expected numbers.
Trading earnings isn’t easy, but it can be very profitable if you do it correctly. Here are a few things you can do to lower your risk while trying to trade for big profits in earnings…
Use a trailing stop. Stocks not only can jump higher on strong earnings, but also can fall on weak ones. Have a trailing stop in place so that if a trade goes against you, you’ll get out with a manageable loss.
Don’t let a trade become an investment. Trailing stops help with this. The last thing you want is for a short-term trade based on a specific catalyst to languish in your portfolio for months.
If the stock is moving higher, great. Let your winners run, and use the stop to exit when the ride is over.
But if the trade goes bad, get out. The catalyst you bought it for has passed, and there is no longer a reason to hold it.
Buy calls instead of stock. Calls will allow you to risk less money upfront and capture a larger percentage gain if the trade works out. If it doesn’t, you’ll lose less cash.
Buy protective puts. If you own the stock, you can use puts as insurance to protect your position. If the stock tumbles, your puts will cover some or all of your losses.
If not, you’ll have spent a little bit of money on an insurance policy you didn’t have to cash in, which isn’t the worst thing in the world.
If you put these strategies to work, you may be able to score life-changing profits despite 2020’s challenges. Just be sure to take steps to protect yourself so you can go into the season with the best chance of making money and the least chance of losing it.
Good investing,
Marc
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