SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

What to do when a Stock Misses Earnings


During earnings season I get asked all the time about big earnings losers. “Should I buy stock XYZ? It’s down 10% and is surely going to bounce back!” My answer is simple … When a stock blows up, Don’t Buy Today!

I began my career on the floor of the Chicago Board of Options Exchange in 1999 straight out of college. For a year, I stood next to two options trading legends, soaking up all of their wisdom as their clerk. That year, the market ripped higher as virtually every dot-com stock exploded higher day after day. I learned a great deal during that bull run.
 

Here is a picture of a younger me (with more hair) in my trading pit on the CBOE.
 

image.png

 

Soon after I became a trader myself, the Nasdaq fell apart. The dot-com bubble burst, and valuations were reset for virtually the entire market. I learned even more during those bearish years than during the bull market years! Certainly I learned about catching falling knives in a bear market.
 

And one rule that I took away from the bear years is about stocks that have taken a big dive on earnings.


The old trading rule that was hammered into my brain by my two trading legend mentors was this:


If a stock takes a big fall, whether it’s on earnings or some other news event, you MUST wait at least three trading days before even thinking about putting on a bullish position.


The rationale behind The Three-Day Rule is that if a large hedge fund or institution owns millions of shares of a stock, it won’t be able to sell out of its entire position in a day or two without causing the stock to fall.


My LinkedIn (LNKD) Example


Instead, the institution will parcel out its sales over a couple of days, so they don’t depress the stock and can sell at better prices. For example, let’s take a look at LinkedIn, which fell from 192 to 108 in one day on a disappointing earnings release. That was a staggering fall! The next day, the downgrades came pouring in from the brokerage houses (thanks for the downgrades after the fall!).


Based on the three-day trading rule, I wouldn’t have considered adding a bullish position on Friday, February 5, Monday, February 8 or Tuesday, February 9. But on Wednesday, February 10, according to the rule, I could begin to think about adding a bullish position.


Here were LNKD’s closing prices on the day of its earnings report and the following days:
 

image.png


As you can see, there remained selling pressure on LNKD in the three days after the big drop. Then, slowly but surely, the stock stabilized, and buyers began to take over.


I do want to warn, if you follow the three day rule I am sure you are going to miss some stock rebounds. This isn’t a rule that works 100% of the time. However, it has been my experience that more times than not it takes time for stocks to be sold out by institutions, before rebounding.


However, if you can’t waitto play a bounce you could sell puts to get bullish exposure. This is an options strategy that is often used by traders who are willing to enter a long stock position in a stock at a lower price than the stock is currently trading at.


Or longer term, an options trader could buy LEAPS (Long-term Equity AnticiPation Securities) which are options with expiration dates that are longer than one year. The advantage to this strategy is that it gives the holder of the LEAP option a great deal of time for the stock to recover and before the option expires.


Your guide to successful options trading,

Jacob Mintz

Jacob is a professional options trader and editor of Cabot Options Trader. He is also the founder of OptionsAce.com, an options mentoring program for novice to experienced traders. Using his proprietary options scans, Jacob creates and manages positions in equities based on risk/reward and volatility expectations. Jacob developed his proprietary risk management system during his years as an options market maker on the Chicago Board of Options Exchange and at a top tier options trading company from 1999 - 2012. You can follow Jacob on Twitter.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Ready to Invest? Here's How to Get Started with Online Trading

    I am struggling with making the decision to get started.  How much money do I need to be efficient and effective following your instructions?  What software and where to find it?  I could really benefit from extra income but I am also in a position where I can't really afford to lose much so there is some doubt/fear.  But, your information and attitude felt right to me so I reached out.

    By Karl Domm,

    • 0 comments
    • 111 views
  • The Importance  of Proactive Hedging in Options Trading

    Investing in the stock market can be a daunting task for even the most experienced investors. With the constant fluctuations and volatility of the market, it can be difficult to predict the future direction of the market. This is where options trading comes into play.

    By Karl Domm,

    • 0 comments
    • 186 views
  • The Silent Bank Run

    Long before Silicon Valley Bank failed, the banking sector was experiencing a silent bank run. Unlike the Great Depression, where lines of people clamoring for their money were blocks long, this silent bank run, as its name portends, has been out of sight until recently. There are a couple of reasons for this. 

    By Michael Lebowitz,

    • 0 comments
    • 153 views
  • High Probability Strategy: A Holy Grail of Options Trading?

    A lot of options traders consider a 90% probability strategy a Holy Grail of trading. After all, if you can win 90% of the time, you should be able to grow your account very quickly, right? Well, not only this is not necessarily true, but in fact, a Winning Ratio alone tells you nothing about your chances to be profitable.

    By Kim,

    • 0 comments
    • 138 views
  • The 10 Best Options Trading Books

    Options trading can be challenging. I look at it as a journey, a long term investment, which is no different that graduating from University. And like University, you need to do a lot of reading, along with a lot of practicing. Fortunately, there are a lot of books out there that can be of tremendous help in this journey.

    By Kim,

    • 0 comments
    • 253 views
  • OptionNET Explorer (ONE) Software

    OptionNET Explorer (ONE) is a complete options trading and analysis software platform that enables the user to backtest complex options trading strategies, analyze their results and monitor them in real-time, all from within a single, user friendly environment. 

    By Kim,

    • 0 comments
    • 250 views
  • What Happened to SFO Magazine (SFOMag)? Stocks, Options and Futures Magazine

    Remember SFO Magazine? Traders like Jack Schwager and Brett Steenbarger used to write for the publication before its swift shutdown in 2012. What happened. SFO (Stocks, Futures, and Options) magazine was a monthly financial magazine focused on trading and investing in stocks, futures, and options markets.

    By Pat Crawley,

    • 0 comments
    • 866 views
  • How to Use the Finest Covered Call Strategy

    Investing in the stock market can be a great way to grow your wealth over time. However, it can also be a volatile and unpredictable place, with sudden swings in stock prices causing anxiety for even the most experienced investors. This is where the covered call strategy comes in - a popular options trading strategy that can help manage portfolio volatility.

    By Kim,

    • 0 comments
    • 781 views
  • Put/Call Parity

    Put/call parity is a crucial concept in options trading that establishes the basics of option pricing. The formula, introduced in 1969, came years before the seminal Black-Scholes pricing model. As such, it was one of the first formulations of quantitative option pricing and served as the foundation for future pioneers like Black, Merton, and Scholes.

    By Pat Crawley,

    • 0 comments
    • 411 views
  • What Are Cash-Settled Options?

    Options are finite, wasting assets. They have a shelf-life, and they cease to exist after their expiration. So when that expiration date comes, there needs to be a mechanism in place to ensure that both sides of an option contract hold up their side of the bargain.

    By Pat Crawley,

    • 0 comments
    • 943 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido