[1]It’s a simple fact that stocks gap. The indexes gap. The news flow causes it, upgrades and downgrades cause it, and even just excitement or fear at times will cause stock gaps [2].
There are common gaps [3], which tend to be small, and then there are of course bigger, harsher gaps like breakaway gaps [4] or runaway gaps [5].
Alot of these actually do end up getting filled, whether quickly or eventually, but let’s talk about one major cause of sizeable gaps: earnings season.
Right now we’re getting into the thick of earnings season, which is a few weeks long after the end of the quarter. Companies need to report their results for Q2 and let shareholders know how business is going.
Business, schmizness…I’m a trader.
The Importance of the Clock
So while I don’t really care much about the business environment for XYZ Corp., I have to recognize that holding a position into that earnings report means one thing – the inability to manage my risk.
With company-specific news set to be released imminently, I know that the stock is likely to bolt one direction or the other. That’s not such a big deal in itself, but the problem is that earnings reports primarily occur outside of market hours.
That means by holding a stock overnight when they’re set to report earnings (whether after the closing bell or before the next day’s opening bell), I’m inviting a big gap to come along. Even worse, I can’t do anything about it.
Maybe it results in “free” money for me if the stock goes my way, but it could just as easily result in a black eye – or the loss of a limb! Have you seen some of these earnings gaps?
So what I do to manage the gap risk associated with earnings is simple: I do not hold a stock going into earnings.
Not a dramatic enough answer for you? Well, what are you in the market for…money or excitement?
Why Do You Trade?
If it’s profits you want, then you care about preserving capital [6] and managing your risk [7] whenever that capital of yours is on the line.
But of course if it’s excitement you’re after, then you just want a story to tell [8] – and you’ll get it when you hold positions into earnings reports. Only problem is, nobody really wants to hear about it.
The Visual Version
Last night over on the trading videos [9] site, I posted the following video. In it, I discuss this topic and offer a practical way to manage gap risk during earnings season.
Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.
And here are 3 earnings calendars I reference in the video, they’re certainly worth bookmarking:
EarningsWhispers.com [10]
Yahoo Finance [11]
Earnings.com [12]
Thanks for stopping by and I’ll see you here soon with more. Until then…
Trade Like a Bandit!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com [13]
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
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