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The No. 1 Pitfall for Traders

March 05, 2017

This stock can’t lose…

Earnings are expected to be great…

It’s a “sure thing.”

These are just some of the things I've heard traders say prior to trading earnings.

And to be honest, isuch thinking has cost them a good deal of money.

It may seem appealing to either buy or short a stock, or even pick up an option ahead of earnings on the idea that IF you’re right, the stock will make a substantial move in one direction, and you can make a fortune.

Unfortunately, as many of us learn the hard way trading earnings can be an impossible task. I’ve seen situations where the company has beat on earnings and raised guidance, and the stock falls out of the sky.  On the other hand, I’ve seen companies miss earnings by a mile, and still manage to rally like there’s no tomorrow.

Yet traders do it anyway… and then ask why they lost so much money.

The other night, Tesla beat sales estimates by $100 million.  It even saw global net orders jump 49% year over year for its Model S and X combined.  The stock began to jump, gaining nearly 3% on the initial news. 

Unfortunately, what traders managed to ignore was the fact that the company had a nearly $1 billion cash burn rate, a number that is only set to rise as the company rolls out even more growth initiatives.  Other traders ignored what some analysts called a “phantom beat,” given the exclusion of the Solar City acquisition costs from estimates. 

On that realization, TSLA slipped close to $14 share the following morning. 

Earnings may have seemed great initially, but it truly wasn’t, which is why you must use caution when – and if – you trade earnings.

Even options traders screw it up.

The very expectation of an earnings release can cause an option price to experience higher levels of volatility. However, once the event has come and gone, the option volatility is sucked right out of the options like a vacuum.

In the end, stay away from trading earnings. It can cost you big.


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