Day 2 Earnings Strategies?
By Dave Mabe
Here's a follow-up question from Varun, one of the interns in the current cohort at SMB Capital (name used with permission):
Varun:
You mentioned trading day 1 earnings yourself - my day 2 work found only a thin unconditional edge survives there. Did you ever try day 2 and kill it, or never look? Curious whether that's an absence or a graveyard for you.
Dave:
Yes, I trade a few strategies you would consider "day 1 earnings" strategies.
As far as day 2 goes, I have one strategy in that bucket (and it doesn't concern earnings).
There is edge on day 2 plays, but in general I like day 1 plays better.
Why?
Several reasons, but it mostly boils down to recency and number of trades.
A day 2 strategy, by definition, has additional requirements.
That is, there needs to be a day 1 that has done something first, then you layer some more requirements for day 2.
Why is that important?
You will almost certainly end up with fewer trades in that strategy.
But as a thought exercise, consider a day three strategy, a day 10 strategy, or even a day fifty strategy. (!!)
How much "oomph" can there be for a signal that far removed from the original event?
To find enough signal strength to make a strategy tradeable, you'll certainly end up with fewer trades.
When in doubt, trade the event itself first.
When you exhaust that event, then focus on downstream derivations of it.
-Dave
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