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Table of Contents

  1. How many stocks should I hold?
  2. How do I make my selections?
  3. Why do you trade only options?
  4. How do you select an option?
  5. Your data only goes back through 2003...Why?
  6. How do you multiply profits?
  7. Do you use stops?
  8. When Do you add new stocks?
  9. What is the holding period for these trades?
  10. What do the asterisks mean after some of the earnings dates?
  11. Why do I see the earnings announcement dates change just before they are due?
  12. How do I protect myself from a market selloff or a catastrophic (9/11) event?

 

How many stocks should I hold in my EarningsTrader Portfolio??

We would hold no more than eight to ten at a time.  The reason is that when you get many more than that it is hard to keep track of the individual stocks on a day to day basis and you tend to ignore what is going on.  Additionally of course, most folks can't possibly buy all of the signals or they would have so little capital in each position that their commissions would become a large part of their position.

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How do I make my selections then, if I want to pick just ten stocks?

Before we had trade filters there were far too many stocks to choose from and new traders want to run out and get all ten stocks the first day. We advised then to winnow the trades by choosing only positive announcements since they had a substantial statistical edge. Now that we have the filters in place we have already narrowed the number of stocks down to less than 10% of those available to choose from before and it is a tossup for Positive OR Negative signals, so with only 5 trades per month from each group it is not as difficult a decision. Instead, look at the daily stats. I DO look at volume stats on lower priced stocks and generally end up with higher priced issues.The reason is twofold. First of all I ONLY buy options on stocks. That is a personal choice but automatically culls some more off your list, and I have found by sticking to those stocks with options never run into a liquidity issue.. Nothing worse than getting stuck in a trade where you are the majority stockholder....there is nobody left to buy the stock from you at anything but a bargain price.

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Why do you only trade options?

Options are not for everyone and I do not recommend them unless you are thoroughly familiar with how they work.  I use them as proxies for the stock, not pure options plays.  I have given you some specifics in the manuals, but the primary reason  is that I generally am only putting up about 10% of the amount of cash that I would have to commit for a comparable number of shares of stock, and I get about the same amount of return as if I had put up the whole amount, yet even if I were to lose all of my options money it is generally less then the cash loss on a comparable number of shares of the stock.

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How do you select the option?

The same way I would for any of our strategies, but you have to ensure that by the time the earnings are due to be announced there is at least one month to the next expiration. We don't want to be holding any option closer than one month to expiration since this is when premium is lost exponentially. I use the OptionMizer Excel program from pitbullinvestor.com that is available with any subscription, but we will be putting a live applet on this site in the next few weeks to replace that standalone program for the Excel deprived.

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Your data only goes back to early 2003...why?  and what would have happened in a down market slide like we had in the recent bear market?

The reason the data only goes back that far is this kind of data is very difficult to get in retrospect.  I have trading notes going back two years, but that doesn't lend itself to the hard data analysis most folks would like to see. 

What I found was surprising...In the deepest decline periods you would have expected that the obvious technique would be to short stocks with negative earnings preannouncements.  In fact you did far better buying them (after a suitable waiting period as described in the manual) because instead of just losing 1 or 2 percent in the next couple of days after the preannouncement, they would get hammered for 10 or even 20 percent. Investors tend to be unforgiving and completely overdo it but after the required lag in the system provided excellent buying opportunities.  The same was true for even "Good News" pre-announcements that couldn't show that their news was liable to extend into the next quarter...They would get punished in the same way and provided excellent opportunities.

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You mentioned before that there was a way to multiply the profits from options trades while still limiting the risk...How?

Options provide you the leverage to use only a small amount of your capital to get near an equivalent return without putting up all of the cash required to purchase the underlying stock.

Most folks use standard Black-Scholes formulas and calculators to figure the best option to buy ASSUMING that they are going to hold it to expirations.  WE ARE NEVER going to hold it to expirations, so the formula gets thrown out the window.  As you know from reading the manual , we are going to buy a minimum of 3-6 months out, deep in the money and NEVER hold an option closer than 1 month to expiration.

We select our option based on its returning, based on today's stock price a MINIMUM of 60 cents on the dollar for every dollar increase in the stock AND, if the stock moves in our favor, very quickly getting near 1:1 parity with the changing stock value. You can't do better than that right?If we just hang on to the option when it reaches 1:1 we are locked into the stock, but if we take those funds, cash them out and re-invest in a different option that gives us 60 cents on the dollar again AND the stock continues to climb, it is like reinvesting dividends or compounding interest at the bank....let me give you an actual example: 

Here is an example of the trading power of options when used for long term positions.  It was done with a proxytrade, but is applicable to any position where you expect substantial gain and a longer term time frame than just a few weeks. It reflects a period of little index movement in the SP500 over a 6 month period. By using the leverage power of the index it was possible to turn a marginal situation into a winning one, but through the use of options profits grew exponentially

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Basically, we started out with a 3 to 6 month option with a delta of .6 to .7 (meaning that every dollar of underlying would move 60 to 70 cents in the option). We continued to hold this option until one of two things happened...either we got to within one month of expiration (we never hold closer than that), or the delta increased above .90. Once the delta gets to 1 you can never get any further leverage. The secret at that point is to sell your options and reinvest the returned increased capital in lower priced options 3-6 months out and between .6 and .7 delta again. This is just like compounding money at the bank and as you can see from the chart above the results are well worth the effort. This can be used with any position that you anticipate being in longer than 1 month. By rolling the options we are multiplying the leverage effect.

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Do you use stops??

Because I use options to limit the risk, the amount I put up is the equivalent of a stop.  I am prepared to lose it all because I am working on the 70% + odds of winning overall.  Those who do not use options should consider either a sliding scale stop method such as we use in then Pitbull Long Trading system or a fixed stop appropriate for your pain level. Generally I feel stops limit trades of a longer term nature because they do not allow for normal market volatility over a 60 to 90 day period.

Here is how the sliding scale works:

1. For stocks from $5 to $10 a 2$ trailing stop
2. For stocks from $10 to $20 a 3$ trailing stop
3. For stocks from $20 to $30 a $3.50 trailing stop
4. For stocks from $30 to $40 a $4 trailing stop
5. For stocks from $40 to $50 a $5 trailing stop
6. Above $50 pick a % drop, (your comfort level-7 to 10%),from the highest price that the stock achieves during the time you hold it and place a stop updated as required.

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When do you add additional stocks?

Since I limit the number of stocks I hold to 8-10, I would only add a new stock when one has been either stopped out (if using equity) or when a position is closed because of an exit signal. At that point you can evaiuate the new daily stocks to pick a new addition. Don't be in a hurry to make your selection...there is a new train along almost every day.

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What is the holding period for these trades?

Some companies will make preannouncements at the same time that they give their earnings reports for the last quarter.  That means that the holding period will be three months.  Other companies will preannounce at any time up until the real earnings are announced, so the holding period will be appropriately shorter.  We ignore preannouncements that are less than two weeks before earnings as there generally is not enough of a play to be made in the short time span before the event. By checking the daily stats you can see what the current average holding period is.  As I write this is averages 51 days.  At the current average rate of return of 12%+ per trade, that means that you can flip these trades about 7 times a year.

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What do the asterisks mean that appear after some of the exit dates in the active table??

They simply mean that at the time of the preannouncement the next earnings announcement date was not known and a "filler" date was inserted.  For options purchase purposes you should assume a 3 month cycle which means that you would be looking at options that are at least 4 months away from the preannouncement date in the table.  The "filler" date will be changed to the actual date as soon as it becomes available.

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Why do I see earnings dates change in the last week before they are due??

The companies many times adjust the date that they will make their earnings announcements.  This may be because they believe it is more timely, or simply that they aren't finished.  Most of the time the dates remain locked in concrete, but we start checking 5 days before the original projected date so as to catch any last minute changes. At that point we adjust the expected date which will change your exit date. This ensures that you are not surprised by a revised date.

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WHAT DO I DO IF I SUSPECT A MARKET CRASH (MAJOR SELLOFF) OR A CATASTROPHIC EVENT (9/11)

As a generalization of conventional wisdom, all boats (stocks) rise and fall with the tide (trend).  That means that if there is a major retracement these stocks are liable to go with the trend.  These stocks tend to hold up better in downtrends and will come back faster than the average.  Still, there are those who do not wish to take on that much risk, but at the same time don't want to use stops on stocks or options.  In that case we would buy long term panic protection in the form of LEAP INDEX PUTS...very much out of the money that will be cheap and at the same time appreciate rapidly if the market were to tank suddenly as in the case of another 9/11 type market shaking event.  You could view it as term panic insurance. Any index could be used, but the most common would be the NDX or the SPX.

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Revised: 09/30/11.