Hey Trader,
This week, a stock I’ve traded dropped $20 on earnings. It’s the reason I hedge stocks before earnings every time.
Going into the report, its expected move was just $4. That’s the swing the options market was pricing in.
The stock fell 5x further than anyone expected.
The company was supposed to earn $1.33 next quarter. Now it expects about 40 cents.
Nobody saw that coming. Even inside information on the earnings number wouldn’t have saved you.
I’m a guy who’s lost hundreds of thousands around earnings. I never ride a report naked anymore.
A few reports like this one take an account from 100 to 75 to 60. That’s usually when people quit.
I use three ways to hedge stocks before earnings. I can sell the stock, insure it with a put or buy a straddle.
Picking the right one comes down to whether you’re up on the stock and whether you want to keep it.
I’ll show you when each one makes sense, using real trades from this week. Let me start with the stock AmDocs (DOX), or as I like to call it “Doxxed.”
Why I Hedge Stocks Before Earnings
I call this stock Doxed. Getting doxed means your identity gets exposed for everyone to see.
This report exposed the truth behind the company. The stock had run from 50 to 65 before the numbers came out.
Then it fell $20 in one shot. When you see the chart, you’ll swear it’s a misprint.
It isn’t one. Doxed shows exactly why I hedge stocks before earnings.
The PE multiple looks low now. That number only looks backward.
The guidance tells you far more about where the stock goes next. Knowing the earnings in advance wouldn’t have helped either.
Say you knew they’d beat by 20 cents and bought 10 calls. You’d still have blown out your account.
Even with the numbers in my hand, I couldn’t tell you how the market would react. I hedge stocks before earnings because I can’t predict them.
Around earnings, there are no smart people. There are only people who know how to hedge.
When I hedge stocks before earnings, I use one of three moves:
- Sell it. If I’m up, I take the money before the numbers hit.
- Buy a put. If I want to keep the shares, I insure them.
- Buy a straddle. If I can’t pick a direction, I stop guessing.
Way One: Sell Before The Report
Selling is the simplest way to hedge stocks before earnings. You can’t get hurt by a report on a stock you don’t own.
I owned Doxed earlier, buying around 54 and selling at 64. I wouldn’t have hedged that position.
I would’ve just sold it. When I’m up on a stock, I want out.
Take the money and put it away while you can.
A good number won’t protect you either. Even with bullish guidance, the market can still crush a stock.
If you worked for me and held Doxed naked into that report, I’d fire you. You had a nice gain sitting right there.
If you’re up on a stock before earnings, that gain is your reason to sell.
Way Two: Hedge Stocks Before Earnings With A Put
Sometimes you want to keep a stock through the report. A put lets you hedge stocks before earnings without selling a share.
A put is an option that gains value when the stock falls. It works like insurance on the shares you own.
On Doxed, all you had to do was buy a put. Here’s what that looks like with simple numbers.
Say you owned 100 shares heading into the report. A $20 drop takes $2,000 out of your account.
A put costing $4 a share runs $400 to cover those same 100 shares. As the stock falls, the put gains value and offsets part of that $2,000 loss.
That’s the price of insurance on a stock nobody could read. A few dollars a share is all it takes to hedge stocks before earnings.
Way Three: Buy A Straddle When You Can’t Pick A Side
Sometimes you can’t tell which way a report will break. When that happens, don’t pick a direction.
Use a straddle to hedge stocks before earnings when you can’t pick a side. That means buying a call and a put at the same strike.
A straddle pays off when the stock makes a big move either way.
Duolingo is one of my favorite stocks. Its report this week shows why a straddle works.
The earnings missed. The stock ran anyway on higher guidance.
Money was already flowing in before the numbers came out. Some traders shorted it anyway, expecting the miss to sink the stock.
The market rolled them over and crushed them. I’ve watched Duolingo break hundreds of portfolio managers.
It’s bankrupted hundreds of traders too.
A straddle doesn’t need you to call the direction. It needs a move big enough to cover what you paid for both options.
If the stock barely moves, you can lose that cost. You know that risk before you enter.
That beats getting blindsided by a $20 gap.
You hedge stocks before earnings to survive the report. Value tells you which stocks are worth holding into one.
Skyworks beat by 30 cents and still got knocked down. It bounced off support because it was trading at fair value.
Skyworks traded at about 16 times earnings. That’s fair for a company that’s historically grown about 15%.
Skyworks was on our Genesis COG buy list. We bought it when the PE was even lower and sold it about $15 higher.
You hedge stocks before earnings to survive the report. Value tells you which stocks are worth holding into one.
Skyworks beat by 30 cents and still got knocked down. It bounced off support because it was trading at fair value.
Skyworks traded at about 16 times earnings. That’s fair for a company that’s historically grown about 15%.
Skyworks was a Burn Signal trade. We bought it when the PE was even lower and sold it about $15 higher.
The options play on that alert closed up 118%. I price the stock first, and I never let an earnings report make the trade for me.
Burn Signal options plays work a lot like the hedges in this article. Most are defined-risk debit spreads, so you know your maximum loss before you enter.
Every alert gives you the ticker and the signs that triggered it. You get a stock play and an options play, and you decide how to trade it.
Since April 14, nearly four out of five Burn Signal trades have won. Every loss had a cap, and the average trade cost about $170.
Professor Jeffrey Bierman
Creator of the Genesis COG System
