Earnings: Should you hold?

We are often asked about how traders should handle earnings and if TL has any rule of thumbs on when to hold a position into earnings and when not to hold.

The golden rule is as follows:

You must never hold a stock through earnings if you don’t have enough cushion to protect against the potential downside.
You must never hold a stock through earnings if you don’t have enough cushion to protect against the potential downside.
You must never hold a stock through earnings if you don’t have enough cushion to protect against the potential downside.

Now what is a cushion and how do we measure it?

Simple. Cushion is referring to your progress on the position. If you are up 20% we would call that a 20% cushion.

There are several questions you must ask yourself.

  1. Is the stock you own liquid on the options market?
  2. If the above is true, head over to optionslam.com, type the symbol into the search on the top right and look at the Implied Monthly Move or Weekly Move into earnings.
  3. If the stock you own is illiquid on the options markets – is the cushion you have into earnings a minimum of 10%?
  4. How has earnings season been thus far – have stocks in the group reacted well to earnings in general? Is the market in a solid uptrend with healthy, broad-based leadership?

Answering the above will give you a solid answer on if you should be holding into earnings and if you have sufficient cushion. Remember that earnings events are binary events – you must be willing to give up the gains you may have on the stock and there are no guarantees.

For example, let’s say the Implied Move is 15%. This means the stock is expected to move up or down 15%. You have a 50% cushion which means you have room in case they gap down. Remember we are dealing with the stock market here and it can always gap up or down further but the Implied Move is a good guide overall.

Now it’s up to you if you want to hold or sell and be ready to buy it back. This is when you would ask yourself question #4. Let’s say stocks in the same group have been having good earnings and the overall market is in a healthy uptrend. This would be further evidence to support holding through earnings.

If the market is healthy and in an uptrend, other stocks in the same group look good, and we have enough cushion, TL will hold. Of course, this will all come down to your own personality and trading style but if you are looking to capture the big moves of the strongest stocks in the market then holding through earnings is part of the process.

Remember the golden rule:

You must never hold a stock through earnings if you don’t have enough cushion to protect against the potential downside.
You must never hold a stock through earnings if you don’t have enough cushion to protect against the potential downside.
You must never hold a stock through earnings if you don’t have enough cushion to protect against the potential downside.

If you have any questions let us know and we will build out a FAQ at the bottom of this page!


Video: Should you hold?

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