I paid $1.14 for a put and sold it for about six bucks.
The company I owned had beaten on revenue. Sales came in ahead of what the street wanted…
And the stock had its worst single day in almost five years…
That trade is why I want to talk to you today about the only rule I’ve got around earnings, because it’s saved me more money than any prediction I’ve ever made.
I rarely hold a stock through earnings. When I do, I buy a put.
There’s nothing clever in it and there’s nothing more to it than that.
People hear it and assume I’m hedging because I expect bad news. I’m not. I buy the put because I have no idea what the reaction will be, and neither does anybody else.
Let me walk you through the Kroger trade, because it’s a perfect example of why.
I was holding 100 shares. The stock was around 64 and I didn’t want to sit through the print naked, so I looked at one number before I did anything else.
The market maker move
Every stock has an expected move going into earnings, which is what the options market says it’ll travel, up or down, on the report.
On Kroger that number was a buck eighty.
So I sat there and thought about it. The stock’s at 64, so what do I care about a buck eighty?
It takes me down to support around 62 and I’m fine there.
The put was cheap because the expected move was small. I paid $1.14 for it.
Then the report came out
Revenue beat and sales came in above estimates, with earnings landing within a penny of what the street had modeled.
The stock got taken down hard anyway. Biggest single day drop in almost five years, right to a 52-week low.
It fell nearly four dollars. More than double what the options had priced.
It was margins, and guidance holding steady instead of moving up. None of that was in the headline number and nobody was handicapping it from the outside.
The put I paid $1.14 for was worth about six dollars.
Now think about what happened there. I was wrong about nothing and right about nothing, because I never made a call on the quarter at all. The put did the work, and the put doesn’t require me to be smart.
What it costs when it doesn’t pay
Sometimes the stock rips seven dollars higher and the put expires worthless.
Good. I gave up a couple hundred bucks to make seven hundred on the shares, and that math works every single time you run it.
People won’t do this because losing $200 on a hedge feels like a mistake, while losing $600 on a position that gapped against them feels like the market being unfair.
It’s the same money. One of them you chose.
The version most people get wrong
If you’re short into a print, you buy the call. Same logic in reverse.
And don’t skip the expected move. It tells you whether the hedge is cheap or expensive, and it’s the difference between a smart hedge and an overpay.
I’ve been doing this 40 years and I’ll tell you plainly. I have never once been able to predict what a stock does on the day it reports.
So I stopped trying and I started buying the put instead.
Professor Jeffrey Bierman
Creator of the Genesis COG System
