How do I trade Buybacks?
TABLE OF CONTENTS
- How do I trade Buybacks?
- TLDR:
- ideal hold time: 1D (intraday)
- A few caveats:
- before buying the stock, check they actually have enough cash on hand to purchase the stock. Some companies announce buyback authorizations as a way to bolster the share price but don't have the cash to make it happen.
- Misconceptions of "missing the trade"
- CASE STUDY: 39% IN 1-DAY OF TRADING
TLDR:
ideal hold time: 1D (intraday)
- Suitable as a catalyst for longer term holds if the financials of the company are strong
- Bigger is better
- Watch out for earnings announcements and market selloffs confounding the trade
If the buyback happens in the morning, the stock price will usually end higher by the closing price, making this a great intraday trade. Often, peak price is seen at mid-day. So the ideal holding time for trading is to buy at the open and sell by the close.
If the stock buyback occurs in the evening ET, the share buyback will alter the price during the overnight hours because there is a lot of time between evening after the market closes at 4pm and 930am the next day - enough time for the buyback to get priced in. When this happens, there is usually a selloff at 930am the next day as traders and holders look to lock in gains. If the selling is strong, the share price will revert nearly to the closing price the previous day - this is the entry point for the trade.
A few caveats:
- before buying the stock, check they actually have enough cash on hand to purchase the stock. Some companies announce buyback authorizations as a way to bolster the share price but don't have the cash to make it happen.
- It's also good practice to ensure the company is in a sector that rewards buybacks - often growth stocks are punished for the decision as investors believe they mark an end to revenue growth.
- If the market is selling off broadly, don't fight the trend. If the S&P 500 index is down more than -1%, it's going to be harder to make money. Generally, this is what throws off the win rates. Best to wait for a more positive day.
- Check the earnings announcement day of the company. If the earnings report is bad or the CEO outlook is bad, that bad news will be weighed more heavily than the buyback and put a drag on the stock price. This is why our alerts have the earnings date on the alert.
- Size matters. Larger buybacks as a percentage of market cap will move the share price more than smaller buybacks.
Misconceptions of "missing the trade"
CASE STUDY: 39% IN 1-DAY OF TRADING
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