How To Buy Stocks: Profit From Earnings Reports Using This Option Strategy | Investor's Corner | IBD

TL;DR

Learn how to mitigate the risk of buying stocks right before earnings releases using smaller position sizes or options trading strategies.

Transcript

as investors a frequent issue you may run into is when an actionable opportunity occurs right before an earnings release ideally we want to buy stocks right as they move beyond their buy point or as they're breaking out but sometimes the breakout is just one day before earnings are due it can be especially tempting when we're seeing a stock acting ... Read More

Key Insights

• 🗯️ Buying stocks right before earnings can be risky, but there are strategies to mitigate the risk.
• 🧘 Starting with smaller position sizes can lower average costs or limit potential damage if the stock reacts negatively.
• 🙂 Options trading, specifically buying slightly out-of-the-money call options, allows investors to limit downside risk while participating in potential upside moves following earnings.
• ✳️ The ideal downside risk for options trading in this strategy is 4% or less.
• 😘 Options trading provides a lower-risk alternative to buying stocks outright before earnings.
• 💄 It is essential to consider risk management when making trading decisions before earnings releases.
• 🖐️ Earnings options plays are not guaranteed to be successful but offer predefined risk compared to buying stocks outright.

Questions & Answers

Q: What are some strategies to mitigate pre-earnings release risk?

Two strategies are starting with smaller position sizes and using options trading. Starting with a smaller position size allows for lower average costs or less damage if the stock reacts negatively. Options trading, specifically buying slightly out-of-the-money call options, limits downside risk while capturing potential upside gains.

Q: How does options trading help in managing pre-earnings release risk?

Options trading allows investors to limit downside risk while participating in potential upside moves following earnings releases. By buying slightly out-of-the-money call options, investors can cap their risk to the total premium paid for the option, providing a lower-risk alternative to buying stocks outright before earnings.

Q: What is the ideal downside risk for options trading in this strategy?

The ideal downside risk for options trading in this strategy is 4% or less. By entering trades with a maximum downside risk of 4%, investors can limit potential losses while still participating in the stock's performance following earnings.

Q: What are the benefits of using smaller position sizes before earnings?

Using smaller position sizes helps mitigate pre-earnings release risk by allowing investors to lower their average costs if the stock reacts positively. On the other hand, if the stock sells off, having a smaller position size means experiencing less damage than with a full position.

Summary & Key Takeaways

• One strategy to mitigate pre-earnings release risk is to start with a smaller position size, allowing for lower average costs if the stock reacts positively or minimal damage if it sells off.

• Another strategy is to use options trading, specifically buying slightly out-of-the-money call options, which limits downside risk while allowing for potential upside gains following earnings.

• With options trading, the goal is to enter trades with a downside risk of 4% or less, providing a lower risk alternative to buying stocks outright before earnings.