Here’s how to trade an earnings pop. Check out Copart ($CPRT) (November 21, 2019)
CPRT ULTA CPRT
I want to look at Copart ( NASDAQ: CPRT ) today. Copart ( NASDAQ: CPRT ) was a stock that was on our Growth Stock List at Stock Market Mentor for a while. We didn’t have that much of a profit in the stock before yesterday’s close, which is when the company reported earnings.
And so just as a function of discipline; and this is something that I’ve seen other traders do, most notably Mark Minervini who has written a couple of excellent books on trading. I have seen Mark talk about not holding a stock over earnings unless you’ve got enough of a cushion in profits to where even if the stock really dumped because of bad earnings you probably wouldn’t lose money on the stock it may just give back your profits.
The way you manage that is, you close half of your trade out before the earnings number is released. So you are booking profits on half of your trade and then the other half, if you have enough of a profit cushion and you can look at options, implied moves and things like that, you can come up with a pretty good estimation of where the stock would go in the event of an adverse reaction to earnings.
The idea is, you take half off of the table for a nice gain and then leave yourself the worst-case scenario on the remaining half of maybe breaking even or something like that. So then you have a 15 percent gain on half of the position that you took off. The other half you wind up having to sell at break-even because the stock dumped 15 percent. Well, you still average, then, 7.5 percent gain on the entire trade so the math works out really well.
We sold the stock yesterday and of course this morning when the stock is up so much I was thinking, gosh, wouldn’t it be nice to still hold the trade. It would have been but that goes against the discipline and you have to be trading the same all the time. You can’t just be guessing, like, I’ve got a feeling that this one is going to work out really well so I am going to hang onto it. If you had done that to Ulta ( NASDAQ: ULTA ) you would still have that feeling and it wouldn’t be a good feeling.
The point is, you have to trade consistently, the same way all the time. But here’s one little trading note: The stock gaps up almost 6 percent, which was a nice move to a new high. But if you look at the intraday action you can see that during the first 10-minutes the stock peaked. So if you are holding the stock what you have got to be doing, if you didn’t sell right into the open, you have to ultimately look at where the stock peaks and then maybe close half of the position when it returns back to $90.00.
Or if you want to, if you want to just give it even more room you are looking at the first low right after the open and then setting a stop and then ultimately even selling the stock here. You are missing on a little bit of a move but you have at least got some method of risk management to protect your gains.
One method that you could use is this; if after 15-minutes, listen to me this is a good rule, after 15-minutes of the trading day, if the stock is trading ABOVE the opening print, which would be here; if the stock is trading above the opening print at 9:45 then just stay long the stock. The stock is being bought and you can deal with it the rest of the day however it moves.
But on the other hand, if the stock is trading BELOW its opening print then you want to liquidate that position because the stock is being sold. It is really kind of a bright-line rule and you would be amazed at the number of times that it can work and both keep you out of trouble and help you book profits on trades like this. I hope that helps but I guess you could say to definitely try the 9:45 a.m. rule. Also, there is nothing wrong with Copart ( NASDAQ: CPRT ) as a company. I don’t think this is the top but it’s the top for right now. So I would be out of this stock and just waiting for an entry back in at a lower price.
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