4) Profit from group think
The Cuban Missile Crisis, for those history buffs, provided a textbook example of group think. A common dilemma for governments, corporations or stock markets, group think can paralyze. It can also result in profit opportunities in the case of the stock market.
So many times the macro environment can take the entire market in one direction or another. At certain times, usually when emotions run highest, pricing can get entirely out of whack on individual names being carried out to sea by the wave. At those moments valuations or future prospects matter little.
Earnings can change that dynamic in a major way. For whatever brief amount of time, the market will attempt to rescue these out-to-sea stocks if earnings results merit such a move. It may only be fleeting, but that’s why Earnings Player trades are over and done with in less than a day of trading. We are simply looking for that slap in the face moment that can result in big price moves for stocks and the underlying options that Earnings Players trade.
For Pandora, its shares were lower thanks mostly to the cold reception of Facebook. The social networking site seemingly lost value every day since going public. The stark action spooked investors in other IPO stocks – especially those tied to the internet. Forget about potential, the assumption was failure – guilty until proven innocent.
The proof of innocence was likely to come in the form of earnings. A strong report by Pandora and a huge move higher would be the result. Sure enough, the company delivered and shares zoomed higher by 20%. That’s how you make a Stone-Cold Lock of the Week.
5) Make your conclusions and play the Earnings Trading Game
One of the biggest problems for investors and traders alike is pulling the trigger. They can analyze and over analyze, but if they don’t execute they will always lose. In order to play the Earnings Trading game, players must make conclusions from their analysis and trade.
I like to call it making an educated guess. As I said previously, if the preponderance of the evidence suggests a certain outcome, go with it. One can never know for certain how a trade will work out, but if you do the work consistently and keep playing win or lose, you will ultimately profit.
In analyzing the Pandora selection it would have been easy to miss the opportunity standing on the sidelines. The company is facing a ton of competition and there were so many shorts betting against the company one could easily get cold feet on this trade, even with a large number of facts suggesting this would be a blowout quarter and a huge Earnings Player trade.
You have to make the trade. It’s as simple as that.