Reasons Why I Stop Playing Earnings Gaps Part 1

The first strategy that I started off to trade options was using earnings gaps. Why I trade them in the first place? What are earnings? What are gaps?

Listed companies in the United States are required to announce their profits and revenue to the world every quarter (3-monthly). This is commonly known as "the company announcing earnings". The idea is very simple. Analysts covering the company would have , based on any available information, to forecast the earnings results for the company before the company actually announce their earnings. Generally, when the actual earnings beat the earnings estimates by the analysts, the stock price will move up!

And given the highly-liquid (super big trading volume) nature of the US stock market, stock price gaps are commonly seen, especially after earnings announcements.For instance, AAPL gapped up by more than $14 after they released their earnings results before market opened on Tue 23 Oct 07.

Why trade earnings? Because earnings announcements are about the few events that are predictable in the market! No, I am not saying that I know for sure if a company will report good earnings or not. We know exactly when the companies will release their earnings results. There are earnings calendars that tells us exactly when every company is reporting their earnings.

Now we know when companies are reporting their earnings, next step is to guess if the actual earnings will beat analysts' earnings forecast right? Things are not as simple as it seems...