The problem with earnings reactions
A company can report good numbers and fall 8 percent, or miss and rally. The market is not grading the quarter; it is repricing expectations for the next several years.
That gap between reported results and price reaction is where unprepared investors get hurt.
Step one: know what is already priced in
Before the report, write down the consensus revenue and earnings figures, and the guidance from last quarter.
Then ask: what does the current price imply
A stock that has run up 30 percent into earnings has already been repriced. Good results may not be enough.
Step two: understand implied volatility
Options markets price in a larger expected move around earnings. The implied move is roughly the at-the-money straddle price divided by the stock price.
If implied volatility is unusually high, the market expects a big move and option premiums are expensive. If you trade options into earnings, you are paying for that expectation.
Step three: decide your position size before the event
This is the step people skip. Ask a simple question: if this stock gaps 15 percent against me tomorrow, can I hold without changing my plan?
If the answer is no, the position is too large. Size for the plausible adverse outcome, not the average one.
Step four: write the three scenarios
Beat and raise
What do you do
Usually nothing, if you already hold. Do not chase a gap up unless it was in your plan.
Beat but guide down
The most common trap. Headline numbers look fine, forward guidance disappoints, stock falls.
Decide in advance whether you treat this as a buying opportunity or a reason to exit.
Miss and guide down
Decide whether your thesis is broken or merely delayed. Write the specific evidence that would break it, before you are emotionally invested.
Step five: decide what you will not do
No adding to a losing position in the first hour after a report. No averaging down because the price "looks cheap now." These rules exist because the emotional version of you will want to do both.
The uncomfortable truth
Most of the edge in earnings season comes from position sizing and pre-commitment, not from predicting the number. You will not consistently forecast quarterly results.
You can consistently control how much you risk on being wrong.
A one-page template
Consensus figures, implied move, position size, three scenarios with pre-decided actions, and the specific evidence that would invalidate the thesis. One page.
Written before the report. That is the whole method.
