Holding Over Earnings: My Opinion

Ok, so as long as I have traded and watched investment shows and been part of trading communities this question always comes up. "do I hold over earnings?" That depends. In my opinion, earnings speculation can be fairly profitable, it can also lose you money. First lets remember the lesson I learned the hard way.

If you are holding OTM options going into earnings and plan to hold, at least switch to ATM or ITM options.

Even holding over earnings you are going to want to estimate your risk and keep it at 2%.

Here is what I do to decide if I will hold, depending on which way I think the stock will go, I will see what has it historically done? Does it run up into earnings and then sell off on good reports, does it stay fairly flat then gap up?

Obviously, in any case you want to increase your probability by looking at those things. See how many times has the stock beaten lately if you are bullish, does it usually beat in the quarter they are about to report? Is it logical that the stock should do well, has it been talked about lately on how well its doing(or how badly if you are bearish).

What is even better is if you can quantify yourself. Like I did with AAPL, however that may not always be doable. Here is what I did, this was all from either internet statistics and logical guessing based on past performance. You can see I was slightly off, but much closer than the analyst estimates.

Apple Q3 earnings estimate

Previous 2006 Q3 notebook sales 798,000

Reported notebook growth compared to year ago, 65%

798,000 x 1.65=1,316,700

Average notebook cost 1,400

1843380000 x .3=553014000

Assuming 30% margin(previous margins)

Desktop sales

Previous 2006 Q3= 529,000

Assuming slight drop in desktop sales 500,000

Average cost 1,300

650,000,000 x 30% = 195,000,000 .

Iphone Q3 sales 500,000

Average price 580

Ipod Q3

Previous 2006 Q3 sales 8,111,000 which was 32% over 2005

Assuming a drop in growth year over year due to iphone lets say 25% growth

8,111,000 x 1.25 = 10,139,000

Average cost assumption 200 dollars

Supposed comments that margins on ipods are “above 20%”

Let’s assume only 20% margins

10,139,000x200= 2,027,800,000

Other music related revenue assumptions

Previous year Q3 457,000,000

Q3 2007 500,000,000

Peripherals

236,000,000

Software, service and other sales

350,000,000

Margins unknown

Total Revenue Estimate

$5,897,180,000

Prediction is for 14.6% profit(equal to previous quarter profit level)

Using that prediction

Profit= 860,988,280

Total EPS= .995 for 864, 950,000 outstanding shares

So, getting all of this is fine what will the stock reaction be? You honestly don't know but using the above things to your advantage can give you an idea, I also compare to what is currently happening. On good earnings and guidance stocks were gapping up approx 10% from similar companies, so I figured 7%-10% move was possible. I was right, but like I said hadn't learned about IV decay after earnings, so I screwed myself.

For GOOG, I figured we would get a run up to 640, I had bought the 640's hoping it would end up in the money before, but it was ATM, I assumed we would get a move to 650 on good earnings at least, being a round psychological number and validating current PE. This move would be hopefully good enough to offset IV decay and then some, it may not have worked out how I planned but I may be able to break even or take a slight loss which is ok because the money making potential was decent and if you can take a few small losses or break evens and get a good gap up(like on ISRG) you'll do fine.

So, if everything checks out I'll hold, a small position now over earnings, if I am unsure I won't hold.