A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.
Welcome to today’s Tuesday trade! Similar to last week, today I’m going to be talking about trading earnings.
Now, let’s take a deeper dive into the earnings trade I put on, February 9th, in Enphase Energy (ENPH).
Going into my ENPH trade, I knew I wanted to be bullish for a variety of reasons. Number one, ENPH is a company that designs and manufactures software-driven home solutions that span solar generation home energy storage and web-based monitoring and control. This means that this ticker is similar to solar stocks, electric vehicles, and more — which is an extremely hot area of the market right now.
I chose ENPH because it has a gorgeous bullish trending pattern. When I say it has a gorgeous bullish trending pattern, it has stacked moving averages and when the ticker pulls back, it typically bounces. Overall, it’s a pretty consistent pattern.
Lastly, I also like ENPH’s ticker specifically around earnings because historically, it has performed very well. Last quarter, before the report it remained mostly flat, but had a huge rally after its report came out. The quarter before that, we saw a breakaway gap. That same event happened the quarter before that! So, looking collectively on the last three quarters, I see that the market is reacting really positively to this company, to their earnings reports, and there’s a really strong technical pattern.
All these factors combined told me to get into this trade.
Five Star Fun Fact: Breakaway gaps is one of my favorite earnings patterns. This is when earnings reports are released and then the ticker explodes upward.
How the trade went down…
For this trade, I chose a put credit spread, which is a pretty conservative way to get into an earnings report.
When I got in it was trading at the 200 price point, so I sold the 200 put and bought the 195 put for protection. That gave me a $5 wide spread. This means that $5 was going to be the max I could ever lose, minus the credit that I got to get into the trade, which was $2.59. This made my risk-to-reward ratio slightly better than a 1:1, which is exactly what I like to get on my earning trades.
Upon the earnings report, ENPH did it again! It gapped up about 10%, or $21, and traded into the 225 price point.
This meant I ended up taking some overnight profits of 66%.
An important thing to note here is I probably could’ve left this trade on since the mood was so strong and there was the potential for a 90% or 100% profit, but I deliberately got out. My strategy is to score overnight and get out since they can be pretty volatile.
Yes, earnings trades can seem daunting and you can experience quite a bit of price movement, it’s important to add them to your repertoire. Every quarter for five to six week periods you have 100 different earnings reports coming out every single night. If you know how to find chart patterns that look just like this example, you have an edge on earnings trades!
If you would like to learn more about how to trade earnings join me this Thursday, February 18th, 2021. I’m going to be joined by Landon Swan, the co-founder of LikeFolio. I absolutely love Landon, in addition to following the company that he has created because he helps me get that edge in trading earrings that I so desperately need.