MLR - A lesson on whether to hold through earnings

Published : July 19 2012 at 10:20 ET

MLNX had a strong earnings report, causing it to gap up above 50% in yesterday's post market action, and nearly 40% at today's open. The question is whether to hold it or any stock through earnings, knowing it could gap in either direction once it reports.

Ask yourself these questions:

1) What is my average cost in the stock?

2) Assuming it is the day before earnings are released, is the stock trading above my average cost? In other words, do I have profit cushion to withstand a gap down in the stock were it to disappoint?

3) What if the stock gaps down 50% on a bad earnings report? Perhaps I should adjust my position size so that if such an unlikely event were to occur, it would not irreparably harm my trading psychology or my capital balance.

4) Should the stock gap up the next day, perhaps I can add to my existing position if it qualifies as a buyable gap up (see for more information on buyable gap ups).

And finally, always ask yourself this general question:

5) What is my overall portfolio exposure to the market? Am I overly concentrated in any one sector? (Note, overconcentration can work very well in a trending environment with a leading group.) Should I reduce or increase my market exposure? Should the general market gap down on some bad news out of left field, and it seems these days left field is crowding out center field and right field, how should I best reduce my portfolio exposure? What are my weakest stocks?

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