I would like to get some feedback if there are any obvious flaws with this strategy of limiting my losses when there's a steep drop in stock price due to negative report after hours.
Suppose I own 100 shares of company XYZ currently trading at $200. The company is expected to report earnings after hours and I expect the earnings report to either be extremely positive or extremely negative. If the company reports positive results, the stock will rise by 10-15%. If the company reports negative results, the stock price will drop by 10-15%.
In an attempt to protect myself from a steep drop in stock price (and cash in if the price rises) I submit a stop-limit order at $185 - $192. If the company reports good results and the stock price rises after hours I earn 10-15%. If the company reports bad results and the stock plummets 15% to $170 I limit my losses at around $190 (5% loss instead of 15%).
I realize that this is a hypothetical example and I'm making several assumptions in this question including the fact that there is equal probability for the company to report good or bad results. But the main question is - is there anything that I might be overlooking that would prevent this strategy from working?
A few things I can think of off hand:
1) If the company reports bad earnings and the stock drops by 15% it might do so instantaneously (not slowly) so it is unlikely my stop limit order will ever get executed (Any truth to this?)
2) When a company reports bad earnings and I look at the chart the following morning it seems the price does fluctuate considerably after hours before it finally 'settles' at the 15% loss. Obviously, to take advantage of the high price point my order would need to be executed after hours. If my stop-limit order was submitted during regular market hours, would it be executed after hours?
3) Someone else could submit a similar stop limit order before I do and their order will execute before mine does as detailed in this response. Assuming there is limited demand at $185 - $192 my order may never get filled (obviously, the earlier I submit my order the more likely it will be that I will reduce my losses)
Anything else I missed?