There are few, if any, certainties in trading. Many experienced traders will tell you to avoid a stock into earnings. For the most part, I tend to agree, especially if you are just slinging from the hip rather than putting time into developing a strategy.
In a market driven by bulls, it can be emotionally difficult to be on the wrong side of an earnings trade. It is one catalyst that can knock a single stock out of sync with the overall sentiment and it can do it with little effort; therefore, trading after a number is often something I discuss here.
Again, there are no certainties. You trade odds, probabilities, history, your gut and in the end, sometimes you'll net a profit and other times you'll be staring down a profit-and-loss statement stained red from the blood of your losses. All right, so maybe that's a bit extreme, but that's how we can feel sometimes when things don't go our way.
Urban Outfitters (URBN) has caused a lot of post-earnings pain recently if you were on the wrong side of the trade. The stock has opened with a 9% or greater gap four of the past five reports and closed with a move near or greater than 11.5% four of the past six reports. Those are numbers you don't want to be on the wrong side of as a trader. Unfortunately, that doesn't make going long volatility a slam dunk. URBN is pricing in a move around 9% and we've seen closes much lower than this two of the last four reports.
The positive side of the coin for volatility traders is the opening gaps I previously mentioned along with the maximum intraday moves over the past two years have exceeded 9% all but two times. Still, one would need good timing to avoid a loss half the time, so playing a post-earnings move may be the better play here.
Over the past nine reports, following the direction of the open has resulted in a profitable trade by the time the closing bell sounds. The caveat here is last November, which saw a massive reversal. The stock opened down some 12% but closed the day down a little less than 4%. Gains have been scattered from large to small, so using a strategy with a defined risk or a stop loss would be the responsible approach. I would add that the difference between the opening gap and the maximum move on the day tends to stay in the 2% to 5% range, with a single time we experienced an 8.7% move. This should lead us to target profits in the 3%-4% range and then set a trailing stop.
If I were in front of the number, I would likely be leaning long volatility because I do believe we'll see the stock move $3-$4 before the day is over; however, I prefer to take the path of high probability and play URBN tomorrow after we see the report.
