Earnings season is filled with land-mines for traders and investors alike. Most traders are drawn to the events as they offer the potential for out-sized volatility while most investors dread the potential for downward swoon of a core holding.
As I grew up in this business, clearly in the trader camp, earnings season was the period 4x a year where you could be either a hero or a goat in the eyes of your capital provider. As I have gotten older (maybe even a little more mature too), I have bit less tolerance for risk around events and I try to think more thematically about stories and look past the earnings event to think about the next potential catalyst. This has been helpful as I don’t find myself in so many binary sort of events. The introduction of the use of options to express many of these views around events such as earnings can be both a blessing and curse as short dated options are not very forgiving following catalysts, but they do offer the ability to define your risk as opposed to just being long or short a stock.
This week you might have noticed that I took some short term bets off the table into earnings events and for the most part they were the right thing to do……in one instance I got complacent and left on an Aug Put Spread in BRCM (here) that is now worthless. I did not go into great any detail on the site about the trade as I didn’t have strong conviction on the short idea, but that was the very reason I lost money. The idea was not well vetted and frankly forgot that the company was reporting and didn’t even look at the position. That is sloppy and frankly I deserved to lose money. The lesson here for the reader is that YOU have to know what you have on, why you have them on and when potential catalysts are……if you can’t answer those questions then you probably shouldn’t have the position on. In the case of BRCM, I shouldn’t have had the position into earnings.
The updates Monday and Tues on AMZN (here) and JNPR (here) were exactly the opposite and frankly saved me a lot of money……In AMZN’s case I knew I was swimming upstream and thought it was best to cut my loses as this was a trade that would be hard to win even if the results were worse than expected.
So to recap, when you don’t have strong conviction on an idea or an existing position sometimes it makes to cut your loses and or do nothing. We are in a tricky spot right now and I think it is prudent to remain cautious and defensive.