5 Rules of Engagement for Trading Earnings

Earnings season kicks off April 12, when Alcoa (AA[2]) is scheduled to
report their quarterly results. As many investors know, earnings season provides one of the best opportunities to profit, as earnings announcements
are the most widely traded event at the company level. 

Since earnings dates are a known event, those investors willing to do the extra work will have ample opportunity for extraordinary gains.

Here are a couple of the “rules of engagement” to remember during earnings season. Refer to them regularly when trading company earnings, as they
have stood the test of time when it comes to investing during earnings season.

Next: Rule #1

Rule #1: Don’t Run With the Crowd

Avoid this temptation when trading earnings. Investors tend to get whipped into a frenzy ahead of an earnings announcement, buying in based on overly
positive expectations. This means that the stock’s price reflects ambitious expectations, which are often difficult to meet.

Under such circumstances, a stock that reports positive earnings is more likely to sell off due to its bloated “behavioral value.”

Next: Rule #2

Rule #2: Look for the Ignored Opportunities

Keep an eye on companies with low expectations headed into earnings (increased put buying or short interest are a couple of keys).

Keeping with the same mindset as the first rule, low expectations are easily matched or beaten, and investors tend to flock to such stocks once
they realize that a buying opportunity has occurred.

Next: Rule #3

Rule #3: Don’t Be the Last to Buy Into a ‘Rumor’

Earnings season has the tendency to exaggerate positive expectations, resulting in feeding frenzies of buying ahead of a report.

Historically, these situations lead to disappointment as the “last dollar” in before the release tends to get hit with the “sell the news” post-earnings
trade activity.

Learn How to Play a Post-Earnings
Move.

Next: Rule #4

Rule #4: Earnings Reports Rarely Matter

Instead, it’s the market’s reaction to the report that is most important. 

That’s right, investors find themselves asking “why?” more often than not after a stock announces its earnings as the trading results often fail
to match up with the report.

This is the reason that analyzing expectations is usually more important than analyzing earnings.

Next: Rule #5

Rule #5:
NEVER FORGET RULE #1

Running with the “crowd” is usually the easiest way to underperform the market. We avoid it at all costs.

Instead, we look for those ignored opportunities and bring them to OptionsZone readers. So keep coming back to OptionsZone.com[3] all
earnings season long to get our best trading ideas.

Related Articles:

• 12 Keys to Trading Earnings for Profits[4]
• Trading Option Straddles
  During Earnings Season
• 7 Reasons You Need a Broker Who Specializes in Options[5]