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Halloween-300x224Playing stocks around earnings is tricky. Playing options around earnings is even trickier.

In this corporate earnings season ahead of Halloween, we have tricks and treats on how to play earnings.

First, what makes earnings so tricky is that you can nail the trend and be on the right side of the quarterly report, but the stock might react completely opposite to your position. We have seen that happen many a time over our trading careers. The scenario is being bullish into a print, the company beats and raises, and the stock goes down. The common explanation is market participants are buying the rumor and selling the news.

On the flip side, this also can happen when playing a bearish strategy on a company where you expect a miss. The company misses and lowers expectations, but the stock goes up, ripping up. Trading earnings is not for widows and orphans.

One of the keys to playing earnings is to know how far “the crowd” is leaning on which side of the boat.  If the crowd is super bullish going into a report, there might be no report that can push it higher.

We are big fans of high relative strength stocks. In bullish markets, high relative strength stocks tend to outperform. We like to say, “when you get a hold a kite, don’t let go.”

One of the key ingredients to high relative strength stocks is a history of good earnings reports and good forward EPS momentum. On flip side again, companies with weakening forward EPS momentum tend to underperform.

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On the following pages are 5 “trick or treat” earnings trades to play next week:

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