Tightening stops day prior to earnings report?

[Cuddles]

Upon seeing the price movement of stocks in my portfolio, it seems logical to tighten my stops the day before an earnings report. If the earnings are bad and it moves against me, the loss is less than usual, however if it moves in favor no harm is done.

The only drawback obviously is the bears knowing or expecting people to do this and thus driving the price down on that day, only to repurchase before earnings are reported.

I haven't paid much attention to bearish timing during those days, so from your experience, is this a good strategy or should I expect my 2nd suspicion to always be true those days?

 

[beerntrading]

You'd get a fill as the spreads widened and the price dropped almost every time, and at much less than your stop. The right answer is get out or ride it out. Most times I've seen a drop that continued and wasn't just a dip was an existential event. Usually earnings releases overreact, quite predictably, and recover. Market makers widen the spread finding what people will do, amateurs panic and drive the price down and then it recovers. In this case, you'd be one of those amateurs. Same thing on good earnings with a spike, but they have a better chance of turning that into a drive up.

 

[Handle123]

First, I don't trail, once I get to breakeven plus fees, it just stays there. I only concerned on stocks am short about earnings-if recent trade I might hedge with options, other wise let it be.

 

[ET180]

You could put on a protective collar for very little cost -- buy a put and use a call to finance it. Pay a little to give the call more room to the upside.

 

[ET180]

Market makers widen the spread finding what people will do, amateurs panic and drive the price down and then it recovers.

I'm not sure that it is amateurs...institutional funds care about meeting benchmarks. At some point they will bail...I doubt it was retail traders that sent Crude oil down 5 points last week. Not enough of them to create that kind of move.

 

[Benihana]

How are you comparing crude oil that trades with good liquidity throughout the whole day to stocks that have barely any liquidity during the extended trading hours?

 

[ET180]

How are you comparing crude oil that trades with good liquidity throughout the whole day to stocks that have barely any liquidity during the extended trading hours?

I'm not so sure that prices necessarily must drop significantly due to lack of liquidity. I was simply referring to the fact that sometimes traders sell not because they believe that prices will go down, but because they have ended up with too large of a position and can no longer take the risk. That can happen in any market.

 

[Benihana]

True, but I think he was specifically referring to moves afterhours on earnings reports. In those situations, liquidity does pretty much evaporate for many stocks.

 

[ET180]

True, but I think he was specifically referring to moves afterhours on earnings reports. In those situations, liquidity does pretty much evaporate for many stocks.

Oh, in that case, he's right. However, if a company releases bad news, the stock will fall unless it's Apple. So I don't see the lack of liquidity in the after-hours as being the issue...it's the potential for bad news that's the risk. It's not like if earnings were released during the day that a retail trader would have an advantage of getting out after bad news before the algorithms parse the earnings report.

 

[Cuddles]

True, but I think he was specifically referring to moves afterhours on earnings reports. In those situations, liquidity does pretty much evaporate for many stocks.

Well, I would think most activity would be pre-market after an earnings report (I'm guessing these are always done after market close and never during trading hours?).

I guess what I'm saying is, the underlying may see a lot of volatility due to bears bringing the price down in order to buy the dip and sell the top if report is positive.