Hey everybody, I’m James from the tastylive Research Team.
We often look to earnings as a trading opportunity. We like to sell options around the current price before the announcement, hoping to buy them back the next day for a fraction of their value. But stocks can also have large moves that trump our chance to manage these trades. I was curious to investigate how stocks tend to behave after earnings. Do they continue to run in the same “knee jerk” direction, or do they fall back in line?
For our study, we analyzed 24 stocks with over 10 years worth of data, allowing for over 1000 earnings occurrences. We divided these occurrences by whether the stock opened higher or lower after the earnings release. First we looked at 1 days’ worth of movement, then extended the observation period over 8, 13, 21 and 34 calendar days.
We found that on trading days where the stock gapped up after earnings there was a reversal about 20% of the time that day, compared to reversals 15% of the time from gap downs. The further we went out in time, the more likely we were to see a reversal back above or below the pre-earnings price, making the case for extending duration when possible.
If you want more detail on this study, including a look at just the “high-flyer” big name stocks, click here!
OK, I’m James Blakeway. Thanks for watching Market Measures Notebook!
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