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Tuesday, October 17, 2006

How To Trade Big Mover Stocks For Earnings

If you have seen the charts of ETN & GWW, you will know what I mean by big movers. These 2 companies released earnings BMO on Mon, and if you have studied their past price movement after earnings, you will have these 2 companies on your watchlist.

So how do you trade these big movers?

You can try a current month straddle if you are unsure which direction the stock will go after earnings. Well actually, nobody can be sure where the stock will head, regardless of amount of research done, unless you have a crystal ball. So betting on one direction is....just BETTING, unless your risk is very low e.g. option costs 0.1, 0.2, 0.3. I'm not saying that a current month straddle has no risk, it still has. The risk is if the stock doesn't move in a big fashion or the IV collapse is really dramatic. You need big movers for straddle because you have to cover the price of 2 legs (both the call & put) to breakeven. Also, the past may not necessarily represent the future. If there are some structural changes to the company, e.g. M&A, I recommend you stay out of earnings even if the company has moved big before. I learnt my lesson in VTS. Paper trade this strategy if you are new to see if it is suitable for you.

Alternatively, you can take note of these big movers and watch for chance to do a day trade AFTER earnings is announced. By then, the IV would have settled down somewhat & knowing their earnings results & analysts comments, you will have a better idea which direction the stock will go. Even better opportunities are those historically big mover stocks which have not made their moves post/pre market. GWW & ETN are good examples. Both have a minimum move of about $4 in the last few earnings announcements.

For today, you may want to watch these companies which have in the past been big movers:
-PPDI (announced 16/10 AMC)
-ILMN, YHOO, SYK (all to announce 17/10 AMC)
-CDWC(18/10 BMO)


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