The quarterly ritual has begun.  The prelude music has given way to the main melody, one which has public companies once again engaging in the old earnings dance. Some have mastered the movements, swaying with the music with nary a misstep. Others struggle to pick up the beat on account of the volatility of their innards. They just can’t seem to strike the right pose for the judgmental investing class.

Among the masters are companies like Pepsi and Verizon. Consumer staples, telecoms, utilities, and like industries are rife with stocks that possess little risk of error during the earnings jig. Their business model is stable, their profit generation predictable. Holding such companies through an earnings announcement is rarely dangerous. A penny beat here, a penny miss there, it all comes out in the wash and the net result of each announcement is nil; a blip on the radar in the grand scheme of things.

And then there are those that live and die by the quarterly dance. It’s a time of extremes. Superb execution is rewarded with a treasure chest of profits, overnight. See Google’s past few earnings reactions for example. On the flip side, companies daring to disappoint the Street are taken behind the woodshed for an old fashion butt-whoopin’ (see LinkedIn’s dismal drop following its last announcement).

The volatile nature of earnings is why many veteran traders sidestep the drama altogether. The whole point in buying or shorting a stock is because you’ve discovered a high probability setup. One boasting low risk and high reward. That dynamic disappears in the face of earnings turning the trade into a coin flip with high risk and high reward.

To be clear I’m talking about directional trades – buying/shorting stock before earnings, buying calls or puts, and so forth. Truth be told many veterans may opt to play the earnings game but they do so with volatility plays or other option strategies better equipped to deal with the gap-fest that is earnings season.

Here are a few items you best be aware of this time of year:

First, the majority of stocks you’re going to trade report earnings in January, April, July, and October. These four months make up earnings season.

Second, the risk of earnings is isolated to the day of earnings. You don’t have to avoid trading a stock the entire month. For example, Apple reports earnings on April 25th after the market closes. There’s nothing wrong with holding a position in Apple all the way until just before the closing bell on the 25^th.  Furthermore, there’s nothing wrong with trading it the next day (26^th) if it has a sweet setup. It’s holding overnight from the 25^th to the 26^th that subjects you to the earnings gap.

Third, be sure to check for earnings on every stock you own or are considering buying. No need to get caught by a major gap unawares. ThinkorSwim makes this task easy. They display an icon next to the stock ticker in the watchlist and position statement as well as at the bottom of the price chart to notify you of an upcoming earnings announcement.

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