How I Trade Earnings (My 4-Step Strategy)

SMB Capital

10,897 views • yesterday Save 13 min 4 min read

Video Summary

A stock's initial surge on positive earnings news can be a trap, as demonstrated by SpaceX's recent performance where a spike above $150 quickly reversed. Instead of chasing this headline reaction, traders should look to the conference call for deeper insights. SpaceX's call revealed strong contract wins and bullish revenue guidance, shifting the narrative despite the weak initial price action. This information, coupled with price action confirming buying interest around $154, created a long opportunity.

However, potential financing challenges and a massive share unlock of 900 million shares present significant risks. The trading strategy hinges on whether buyers can defend key levels like $155-$156. If these levels hold, the bullish case remains intact; if they fail, the supply overhang and financing concerns could dominate, invalidating the trade. This approach prioritizes analyzing the conference call and price confirmation over the initial headline.

Short Highlights

Don't chase the headline spike: Initial positive reactions to earnings reports often fade, as seen with SpaceX.
Listen to the conference call: This is where crucial information about contracts, guidance, and future prospects is revealed.
Look for price confirmation: Wait for the stock to show actual buying interest at higher prices after the call.
Develop Plan A and Plan B: Prepare for both bullish and bearish scenarios based on price action and supply/demand.
Consider financing and dilution: These factors can create significant headwinds despite positive news.
SpaceX's trade: A long opportunity emerged around $154 after the call, but risks remain due to a large share unlock.

Key Details

Step 1: The Headline Reaction [0:11]

The initial reaction to an earnings report can be misleading.
Focus on how the market responds, not just whether numbers beat expectations.
SpaceX spiked above $150 to $152 on good news but quickly faded.

"But how often have you seen that same stock give back the entire move five minutes later?"

Step 2: The Conference Call [1:28]

The conference call often provides more critical information than the initial release.
Listen for announcements on contracts, future guidance, financing, dilution, and share unlocks.
SpaceX's call was bullish, discussing capital expenditures tied to contracts and strong revenue guidance.

"Because now the conversation isn't just about whether the company beat last quarter's numbers. It's about how much revenue the business could generate going forward."

Step 3: Price Confirmation [3:17]

Connect the information from the call to specific price levels.
Wait for the stock to show buying interest at higher prices after the initial reaction fails.
SpaceX offered a long opportunity around $154 as buyers stepped in.

"And when the price action began to support the bullish interpretation, I got long around $154."

Step 4: Plan A vs. Plan B [4:37]

Develop strategies for both bullish (Plan A) and bearish (Plan B) scenarios.
Plan A for SpaceX: Holding $155-$156 and moving higher.
Plan B for SpaceX: Failure to hold key levels due to financing concerns and a potential 900 million share unlock.

"Plan A is the bullish case. The conference call was strong. The company discussed contracts supporting its capital spending."

Risks and Supply Concerns [6:00]

SpaceX faces significant risks from financing needs for massive capital expenditures.
A potential unlock of approximately 900 million shares introduces substantial supply risk.
These factors can create selling pressure even with a positive growth outlook.

"The second issue is the potential unlock of roughly 900 million shares the next day."

Trading Process Summary [7:38]

The recommended earnings trading sequence: headline reaction, conference call, price confirmation, and then planning.
This process helps to avoid chasing initial moves and to align trades with confirmed market sentiment.
Meta's upcoming earnings report is presented as an opportunity to apply this strategy.

"Headline, then the call, then price. Not the other way around."