Earnings Roulette

It’s that special time of year again. Earnings come pouring out of the spigot on a daily basis for about three weeks. This is the time when I trade a bit smaller and use tighter stops. Why? I don’t have to be long or short the company that reports, I could just be long or short a stock in the same sector . Having indirect exposure can be just as deadly, as a whole sector can move based on one company.

This is the time of year when I hear Cramer say “get long in front of earnings”. This, in my humble opinion is the same as riverboat gambling and is NOT trading (unless of course you have a buy and hold approach). Booyah

If you are caught leaning the wrong way on one stock, the results can be disastrous and its just not worth it. An earnings report that doesn’t go your way can negate the  ten good trades you made before it.

Remember these gems from last quarter?





The two examples above can put your P&L through a meat grinder if you have too much exposure. Sure it’s nice when it goes your way, but after doing this for so long it’s just not worth it for me.

$AAPL is my only exception and I only carry a quarter position through the report, I always scale out of the name into strength before the report, therefore I have a cushion and most of my chips are off the table. In the last week or so I have sold three “quarter” positions for ten, thirteen and seventeen points profit. I now have a cushion and the small remaining balance wont hurt me if AAPL disappoints.

As is usually true, when a company misses on a report, the market will show no mercy. Yes you can use options to protect yourself and hedge yourself, but if you are just a straight equity payer with an “all in” mentality, you may just find your self sipping steak through a straw if you’re wrong. So be careful out there.

Good luck out there.

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