Earnings Trading Strategies Explained

Key Concepts

• Earnings Trades: Trading stocks during the period surrounding the release of a company’s earnings report.
• Post-Earnings Trades: Trading stocks after the release of a company’s earnings report.
• Reversion to the Mean: A trading strategy based on the belief that prices will eventually return to their average level.
• Volatility: The degree of variation of a trading price series over time, often measured by standard deviation.
• Delta: A measure of the sensitivity of an option's price to changes in the underlying asset's price.

Preference for Post-Earnings Trading

The speaker explicitly states a preference for post-earnings trades over traditional earnings trades. He identifies as “not your earnings trade type of guy,” indicating a deliberate avoidance of trading during the immediate earnings release period. This preference stems from his observation of volatility dynamics following significant earnings-related price movements.

Reversion Strategy & Volatility Contraction

The core of his trading strategy revolves around playing reversion to the mean. Specifically, when a stock experiences a substantial move – “well outside expected move in one direction” – following earnings, he anticipates a subsequent price correction. He doesn’t immediately trade the initial move but waits “day two or three” to initiate a trade in the opposite direction.

This trade isn’t a simple bet against the initial move; it incorporates delta. He looks for trades “that has a little bit of delta,” suggesting he utilizes options strategies that benefit from a moderate price movement back towards the average. The rationale is that high initial volatility will eventually contract – decrease – creating an opportunity for a profitable reversion trade.

Opportunity in Stagnation

The speaker frames large earnings-related moves not as immediate trading opportunities, but as precursors to potential opportunities. He actively looks for these moves, but only to position himself for a subsequent reversion trade. Conversely, he notes that a lack of post-earnings trading possibilities – “when I see no uh post earnings trade possibilities” – signals a less favorable trading environment. This implies he seeks situations where the initial move is likely to be overextended and unsustainable.

Contrarian Approach

The speaker’s approach is fundamentally contrarian. While many traders attempt to capitalize on the initial momentum of an earnings announcement, he deliberately waits for the dust to settle and volatility to subside before entering a trade. This is a calculated bet against the immediate market reaction, predicated on the belief that prices will eventually revert to a more stable level.

Synthesis

The primary takeaway is a preference for a post-earnings reversion trading strategy. The speaker avoids the high volatility and uncertainty of earnings trades, instead focusing on identifying opportunities created by overreactions to earnings news. He leverages the expectation of volatility contraction and utilizes delta-based trades to profit from a return to the mean. His approach highlights the importance of patience and a contrarian mindset in navigating the complexities of earnings season.