What to do before earnings…
Many of you that have been with me have probably heard me mention the 6-4-2 earnings window strategy.
So, what exactly is it?
First of all, why do stock, ETF, and futures traders alike need to know about earnings?
Certain events, such as earnings, require traders to be cautious because of the volatility and volume that is scheduled to come out on a certain day. Here’s the big question I get all the time:
“How do I play earnings?”
Start with “6.” I start scanning six weeks out from the earnings date. I want to see that (before this earnings event) the market is already rallying. You’ll want to start looking for these opportunities six weeks out. Look for the trends. Remember that the bulk of your profits isn’t going to be the earnings number, but rather that ramp-up in anticipation.
Next is “4.” Within that six- to four-week time frame before earnings, I’ll look to buy the pullback and play the swing high. We are looking to capitalize on the anticipation of a rally into earnings.
Simply put, you want to see the structure of anticipation in this uptrend environment. Now, you might be asking yourself, “What’s the goal here?”
The goal is to not be in the market at earnings!
Finally, the “2” in 6-4-2. Inside of two weeks from the earnings report, I like to say “no” to any setups. I’m running out of time at this point, probably 10 trading days or less.
The implied volatility is going higher. That being said, there’s not a lot I want to do within two weeks of the earnings date.
The closer we get until the earnings day (inside two weeks) any trades get troublesome because you have less time. In fact, it’s going to leave very little time to see the follow-through that we need as well as enough time to get flat by earnings.
That’s why I like starting so far in advance.
Be aware that inside two weeks to earnings, the implied volatility goes up and the market can start acting a little strange. There is a pre-play strategy we’re talking about right now, playing, and being flat before earnings.