Special - How to trade any earnings “pop and drop” even if you’re an investor
Earnings season is upon us once again and that means the “pop and drop” isn’t far behind.
Chances are you know what I’m talking about.
A great stock runs up strong into earnings. Then management posts terrific results and … bada boom … the stock drops hard instead of running higher.
Lots of investors and traders are caught offsides when that happens and left scratching their heads. Adding insult to injury, many cannot understand why it happens. Let alone so fast.
Take JPMorgan Chase (JPM), for example.
The company reported fabulous numbers this morning as expected with earnings of $3.33 a share versus estimates of just $3.01 and revenues of $30.3 billion versus estimates of $29.9. A “double beat” to my way of thinking … then the stock dropped 4.2% in pre-market trading.
The drop has nothing to do with the actual earnings numbers and everything to do with psychology.
Wall Street, you see, knows that individual investors and traders suffer from FOMO. That’s why they go to great lengths to create the excitement early on ahead of earnings. Not afterwards like they used to.
Then they unceremoniously turn the lights out when everybody – meaning retail investors suffering from FOMO - arrives at the party.
It’s the oldest trick in the book. Yet, ironically, it’s also one of the easiest to beat with a simple, low-risk tactic that takes all of five minutes to set up once you’re familiar with it.
The right mindset is key.
Start thinking like a pro because that's how you beat these guys at their own game.
First, be “in to win” ahead of the fight and ahead of the run. This means establishing a position of at least 100 shares (you'll see why in a minute) in world-class companies where FOMO is highest. Think Apple, JPM and other aspirational choices. There are plenty that’ll be reporting in the weeks ahead.
Second, set profit targets at levels that make sense to you. Sell covered calls at that strike to lock in an exit and make a little extra money. It's important that you get a decent premium because you'll need it for step 3.
Third, use part of that money to buy puts that are slightly lower than your targeted exit or current prices to protect against a potential downdraft. Practically speaking this is your "ejection seat" and it creates a hard stop against the drop ... if there is one.
And – voila – you’re done.
This tactic is called the "profit collar" and it’s ideally suited for earnings season volatility.
I'm planning to teach it as part of the One Bar Ahead™ curriculum later this year if that's of interest. (Learn more)
Meanwhile, here's a quick primer on the strategy if you're a DIY'er: (Read)
In closing, let me leave you with a thought.
People tell me frequently that they can’t stand the fact that Wall Street is rigged. Yet, in the same breath how they can’t be bothered to spend a few minutes learning a pro-grade technique like this one even when it can even the odds.
Makes no sense if you ask me because there’s always a path to profits.
The real question is whether you are willing to put in the effort needed to make the journey.
You got this – I promise!
As always, MAKE it a great day and let’s finish the week strong!
PS: There’s no substitute for first-hand knowledge, especially when it comes to the financial markets. That’s why I’d like to invite you to join me at the MoneyShow on February 24th in fabulous Las Vegas, Nevada. The conference is being held at Bally’s and I will be speaking – among other things - about Pro Tips and Tactics for Trading Around Core Positions just like the one I’ve highlighted today. Space is super limited so please (sign up now using this special link). See you there!