Justin’s note: Regular readers know I pass along great opportunities when I see them. Today’s essay is no exception.
With earnings season right around the corner, master trader Jeff Clark says there’s a ton of money to be made using his proprietary system. Read on to learn how he’s making a fortune for his readers…
Trading a stock around its earnings report is like gambling.
It’s exciting. It’s fast action. And if you get the direction right, you can make a lot of money.
But if you get it wrong, then you can kiss your hard-earned bucks goodbye.
For the first 20 years of my career trading options, I loved to trade around earnings announcements. It was fast. It was exciting.
But when I finally took an honest look at the results of my earnings trades, I found it wasn’t very profitable.
Oh, sure, I had some big winners—trades that made me 300% or more on my money in just a few days. But I had plenty of trades where I lost 100% overnight, too.
After adding all of these trades together—more than 200 trades over 20 years—it turned out I was barely breaking even. It certainly wasn’t worth the time and effort it took to research all the ideas and put all the trading strategies together.
So I swore off earnings trades. As much as I enjoyed the action, I couldn’t justify putting in the effort for results that barely broke even.
But in the back of my head, I always thought, “There must be some way to make this work.”
For almost 10 years, I mostly watched the earnings action from the sidelines. Companies would report their numbers. The stocks would make a big move, either higher or lower. And I’d wonder if I would have gotten the direction right if I traded it.
It was painful to stay on the sidelines, thinking about how much money I could have made if I had been on the right side of those moves.
But in the few times during that period that I did dip my toe back into the earnings trading pool, the results were mixed, just like before.
About five years ago, though, I decided to make a concentrated effort to determine if there was a way to get the direction right. Was the market sending clues that I wasn’t seeing? Could I put together a formula… an algorithm that would tell me—ahead of time—the most probable direction for a stock after its earnings announcement?
For four years, I watched the companies of the S&P 500 as they traded around their earnings reports. I noted the volume, the consistency of the moves, the average percentage gain or loss, the option volume in the days before the announcement, the price of the options, the variation to historical premiums, and a whole host of other variables.
Throughout that time, I logged all of that information onto 17 different spreadsheets. Each spreadsheet contains the data for each of the variables. That data helps to determine how important each variable is in predicting the stock’s movement after an earnings announcement.
I then put all of those variables and percentages together and came up with an algorithm for an earnings trading system.
I started trading the system with my own money in April 2016. By April 2017, the system generated 35 total trades. Thirty-two of those trades were profitable. A $1,000 investment in each of those trades created profits of $17,547.
So in May of last year, I started sharing these trades with my Delta Report subscribers.
We’ve executed 11 trades so far. Ten of them have been profitable—including an 80% gain in one day on Toll Brothers (TOL), a 100% gain in one day on Guess (GES), another 80% one-day gain on Oracle (ORCL), and a 53% gain on our most recent trade in Cisco Systems (CSCO).
It’s that trade in CSCO that has me quite excited about the potential for this upcoming earnings season.
You see, on average, the system generates about two or three earnings trades each month. Sometimes more, sometimes less, but on average about two or three. But for the past quarter, the system has been inactive. It only generated one valid trade setup (the CSCO trade).
So I started tinkering with the system. I tweaked some of the conditions it uses to generate trades just to see if it would create more activity.
It did… but not in a good way.
By adjusting some of the parameters, my earnings system would have generated seven trade recommendations this quarter. But only two of them would have been profitable. In other words, the win rate would have dropped from its current level, 90%, down to less than 30%.
Frankly, I’d rather have one trade with a 90% probability for profit than have seven trades and lose money on five of them.
So I’ve gone back to the original system parameters.
This exercise did, however, reinforce the primary purpose of the system—to generate earnings trades with a high probability for profit. Most trade setups this quarter were low-probability trades. They would have been unprofitable. And the system kept us out of those trades.
Looking forward into next quarter… I suspect that just as periods of low volatility in the stock market are always followed by periods of high volatility (and vice versa), periods of inactivity in my earnings trading system are going to be followed by periods with lots of activity.
And if the system performs as it has before, it should be a profitable quarter.
Best regards and good trading,
Editor, Delta Report