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-   -   possible trading strategy? (http://archives1.twoplustwo.com/showthread.php?t=535361)

xxThe_Lebowskixx 10-31-2007 01:10 PM

possible trading strategy?
 
stock market goes up historically
companies go up after releasing their earnings historically
therefore, buy companies a day before they release their earnings and sell the next day. keep doing this over and over again and you should out perform the S+P? correct?

skindog 10-31-2007 01:15 PM

Re: possible trading strategy?
 
Even if this is true, you will likely experience much higher volatility, and significant transaction costs (if you plan to buy/sell after every earnings). Any deviation from expected earnings often results in large swings, and losses of 5-10% are not uncommon.

I wouldn't do it, just my gut feeling.

kimchi 10-31-2007 07:57 PM

Re: possible trading strategy?
 
This sounds relatively easy to backtest. Have you tested your idea on historical data?

xxThe_Lebowskixx 10-31-2007 08:05 PM

Re: possible trading strategy?
 
no. i dont have the means or the desire to, but it would make sense for stocks to make most of their losses or gains directly after earnings. essentially the other 361 days of the year (minus weekends) are speculations based on the next earnings and the last earnings date.

SunOfBeach 10-31-2007 08:30 PM

Re: possible trading strategy?
 
[ QUOTE ]
keep doing this over and over again and you should out perform the S+P? correct?

[/ QUOTE ]

Nope. Been studied extensively in the finance literature, and except for some particular subsets (Piotroski stocks, for example), there's nothing there.

kimchi 10-31-2007 09:19 PM

Re: possible trading strategy?
 
[ QUOTE ]
no. i dont have the means or the desire to, but it would make sense for stocks to make most of their losses or gains directly after earnings. essentially the other 361 days of the year (minus weekends) are speculations based on the next earnings and the last earnings date.

[/ QUOTE ]

If this were your belief then testing it is the only thing you can do (unless it's been done). You could use OCO orders the day before earnings day. If a large move comes then you can ride the wave (up or down) once it starts by being stopped in in the right direction and your 'hedged' order is cancelled.

Whipsaws, retracements, gaps, and slippage etc. would play a huge part in whether you can turn a profit or not - hence the need for diligent testing.

Danastasio1 10-31-2007 11:25 PM

Re: possible trading strategy?
 
[ QUOTE ]
[ QUOTE ]
keep doing this over and over again and you should out perform the S+P? correct?

[/ QUOTE ]

Nope. Been studied extensively in the finance literature, and except for some particular subsets (Piotroski stocks, for example), there's nothing there.

[/ QUOTE ]

Seeking Alpha has a few articles on this subject.

pig4bill 11-01-2007 01:12 AM

Re: possible trading strategy?
 
[ QUOTE ]
stock market goes up historically
companies go up after releasing their earnings historically
therefore, buy companies a day before they release their earnings and sell the next day. keep doing this over and over again and you should out perform the S+P? correct?

[/ QUOTE ]

Did you see CROX today after hours?

Ps3tn0NcYk 11-01-2007 04:31 AM

Re: possible trading strategy?
 
You might reconstruct your theory as follows:

During the period where most companies release earnings, the market is historically more volatile.

The stocks of individual companies also tend to be more volatile around their earnings release.

Therefore buy the volatility of stocks before they release their earnings (using a option straddle, for instance) and sell the position the next day.

Keep doing this over and over and you should outperform the S&P 500???

My experience tells me that the answer to this question is: no, it is unlikely that you will outperform even treasury notes using this strategy when accounting for transaction costs and slippage.

In fact I would not be surprised to learn that selling volatility ahead of a earnings release outperforms buying volatility -- particularly for widely owned companies with a significant deviation in earnings expectations among a population of credible analysts.

Foghatlive 11-01-2007 07:46 AM

Re: possible trading strategy?
 
From my own observations, stocks tend to go down more on a bad earnings report than they go up on a good one. I've seen stocks take 25% hits when they're earnings are deemed poor; on the upside, it's more like 10%.

At some point, you're gonna take some serious body blows.


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