Hedging Against Earnings | Podcast Episode #456

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Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance.

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Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

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You can succeed at the stock market and I’m ready to show you how. Hey everybody, this is Ryan Mallory with shareplanner.com’s

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Swing Trading the Stock Market and today’s episode we are going to talk about hedging during the earnings season.

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Now, I have some specific rules when it comes to earnings season and we’ll get to those in just a second.

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But today’s e-mail comes from a guy, he’s a listener in Canada, told me I could call him whatever he wants.

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I usually get the Florida red names being that I’m from Florida, but I’ve been kind of on a movie kick lately.

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I did big Tom Callahan. I think for today I’m going to go with Lloyd Christmas from Dumb and Dumber.

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Nothing to nothing against the guy who emailed me. I just like that name.

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Lloyd Christmas. I always thought it was a good name.

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So we’ll call this guy Lloyd Christmas so we don’t use his real identity And Lloyd Christmas writes, Hi Ryan, I’m a listener from Canada.

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Call me whatever you want, how about Lloyd Christmas? So earnings season has just started and I have lost a lot of money.

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I’ve been on the wrong side of the earnings for all my long positions. So far my long positions have taken a significant beating this past week and it makes me feel

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absolutely horrible when I see a position just drop 15% within a day. I am just a student working in my gap year and I know you always say not to get emotional, but it’s

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really difficult to see my savings just vanish. My question for you is, is how can I possibly hedge against these earnings report so it doesn’t

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happen again? Or do I have to accept the fact that the company just isn’t very good and I have to take the loss?

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Thank you and I appreciate the work that you do Regards, Lloyd. Christmas.

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OK, Lloyd, we got some talking to do here. You’re in your gap, you’re in college, you’re trying to make a little bit of money off of the stock

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market here. There’s a few things that I see popping up here that that’s concerning me from a swing trading

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standpoint. I never think that you should hold a stock through earnings.

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I don’t do it ever with my swing trades. And yes, there’s going to be plenty of stocks that will drop 15% on you during earnings.

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There’s others that will go up 20% and you’ll feel like a stock trading genius. And when you feel horrible and you like you can’t get anything right when when the stock crashes on

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you following its earnings, you feel miserable. Well, neither situation is indicative of whether or not you’re a good trader.

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Whether it goes up 20% or goes down 20%. One doesn’t make you a good trader just as much as the other doesn’t make you a bad trader.

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What it means though is that you’re holding stocks through a headline risk event, a planned headline risk event too, that you can’t possibly know the outcome to.

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You take the Tesla earnings just recently, they missed on revenue and they beat on EPS. They had a good forecast.

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Now for a lot of companies, they would have taint if you gave him the same exact earnings report, they would have tanked off of that missed revenue side, but not Tesla.

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Tesla goes up 20 plus percent in one day and it goes up another 2 1/2 percent the following day. And why is that?

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It’s the sentiment around the earnings report and and how it relates to the overall company. But if it goes beyond that as well, it goes to the market conditions, it goes to what is its peers

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doing? What are other companies doing?

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How well has the big tech earnings been received so far? There’s so many factors that go into earnings that we as individual traders cannot possibly trade

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them with confidence. It just doesn’t work.

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And so you go into a earnings report, you have to assume that this is either going to work out really well or really bad, and neither outcome do you have any control over.

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So then what? What’s the solution to that?

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To not play the earnings? I never hold a swing trade through earnings.

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Even if you know exactly whether it’s going to be a beat on earnings, a beat on revenue and a beat on the forecast, you still don’t know how it’s going to react.

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So even if you have all that information which nobody has or is not supposed to have, at least you still don’t know what the ultimate outcome is going to be, how the stock’s going to react.

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It may react initially really good, and then when it opens up the next morning, it’s selling off 10%.

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I’ve seen that happen plenty of times. Or it could be really bad.

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You sell it in the in the after hours trading because you see how bad the earnings report received and then all of a sudden you wake up the next morning and it’s up 15%.

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The fact of the matter is, is that earnings season from a retail standpoint cannot be predicted with any accuracy.

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You can say yourself, well, look at NVIDIA. That thing just goes up every time there’s an earnings report.

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I get that it feels that way, but you have no idea whether or not the next one’s going to be the one that goes down.

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So what’s the best way to hedge against earnings? For me, I won’t even buy a stock if the earnings report is coming out in a week.

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For one, I don’t want to get caught up in the stock. And two, I don’t want to necessarily be holding the day before the stock if I can help it.

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Because you just saw what happened with ASML where the earnings leak the day before and that turned out really good for the company.

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It killed all the semiconductors practically, or at least on that particular day. And then of course, you always hear about with earnings that there’s this whisper number out there.

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Still doesn’t help. Even if you know what the whisper number is, what does that help?

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Because you still don’t know how the market’s going to react to that. I’ve seen plenty of companies that beat the whisper number and then it sells off.

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And honestly, I think the whisper number is a little bit more like hokey than anything else because why not just make that the, the, the expectations?

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So I don’t put a lot of stock into the whisper number that people try to associate with the stock at earnings.

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And still, even if you knew it, you’re still having to react to the earnings after the fact. Now he said to the to me on this one question here, he says, do I have to accept that the company

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just isn’t very good and I have to take the loss? Well, it can still be a good company.

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I mean, I’ve seen Meta drop over 20% for missed earnings report and it’s way above where that took place at.

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Now I’ve seen Apple take hits. I’ve seen NVIDIA take hits.

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I’ve seen every stock pretty much take a hit. So I wouldn’t associate whether or not it’s a good company or not.

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I mean, they’re, if they’re making a profit, they’re doing something right. I mean, sometimes these companies drop 10–15% and they made a couple billion dollars in profits.

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So are we really going to say they’re not a good company? No, maybe a stock that’s struggling, but a company’s success and the stock can often times be

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exhibiting a strong disconnect from each other. So I wouldn’t try to get caught up in whether or not it’s a good company or not based off of its

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reaction to earnings. But probably the more concerning thing is the fact that he asks that makes me think, OK, is he

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getting married to his positions here? Because he’s trying to say, well, this is a good company, I’m going to buy the stock here.

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It makes me nervous to use those terms because you’re subjectively trying to put a label on the stock and then assuming that’s the reason why you’re holding it is because it’s a good company.

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Now, from a long term standpoint, there’s some validity to that. Like companies like Apple and Amazon and Google, they’re good companies.

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They’ve proven that over decades now. But from a swing trading standpoint, it, it has no bearing on it.

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Whether it’s a good company or bad company, we don’t really care unless there’s just a large amount of headline risk associated with it.

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Like you take Boeing for instance. I’m not touching Boeing.

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I can tell you another thing, when 1/4 is over in the future, I’m not touching ASML. I’m not going to let somebody hack, hack the earnings and release that out.

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Good grief. That’s the last thing I would need to deal with.

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Another company that’s starting to make me nervous too, from a headline risk is McDonald’s got that whole E.coli breakout.

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Heck no, I’m not dealing with that. But from a swing trading standpoint, whether I get into a company, and I think, well, this company

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may not be around in 20 years, I don’t care about that. Because really right now I’m only looking to trade it for a few days to maybe at best a couple of

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months. And so whether or not they’re here in 20 years, 30 years, I bet, I guarantee you I’ve traded plenty

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of stocks this year that won’t be around even in 10 years. There’s probably some flaws in the company, but from a swing trading standpoint, doesn’t mean that

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you can’t take advantage of some short term opportunities. And another opportunity that I would take advantage of the swingtradingthestockmarket.com.

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This will take you to my SharePlanner website. Really cool stuff there where you can get all my stock market research each and every day.

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You can get my stock picks if you’d like. It’s really just a matter of your own personal preferences.

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It supports the show and at the most basic level, you’re going to get all my stock market research. That’s going to include my daily watch list that I send out with different trade setups that I’m

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looking at each week. I also send out a master watch list where I create all my setups from.

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That’s also pretty cool. It’s a bullish and a bearish watch list.

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And then I do videos throughout the week. I do a watch list review where I go over the watch list each day.

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Plus I’m going over the mega cap stocks and I’m going over the stock market as well, just as a whole, going over like the S&P, NASDAQ, the Russell 2000, different indicators that I’ve got my eye

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on. So it’s, it’s a really good feature.

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You if you like the podcast, you’ll like my research. So check that out.

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swingtradingthestockmarket.com. Now the other big question is, is how is Lloyd Christmas managing the risk?

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Because to me it sounds like he’s not managing the risk because he makes a comment here that says, again, it’s the same comment that he that already quoted, but I’m going to quote it again.

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Do I have to accept that the company just isn’t very good and that I have to take the loss before you ever get into the trade that should be mapped out?

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Where am I going to take the loss at Now? Let’s say you go into A to a stock and you’re in it for a couple weeks or maybe a month or two and

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then the earnings season comes up and then you’re a couple days out from the earnings, but your trade hasn’t been stopped out yet.

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Do you hold it through earnings even though your stop hasn’t been hit? For me, I’m going to close that out every time.

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I don’t care if the stop’s been hit or not. I’m not holding through earnings.

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And yes, I’ve been in Lloyd Christmas place before. I used to do that, like when I first started off, I would hold a swing trade through earnings.

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Sometimes I would buy the day before earnings or the day of. I didn’t care.

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I didn’t even know that they had earnings. I didn’t even know there was 4 earnings reports a year and I would get destroyed.

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I was, I would be down like 20–30%. So based off of what Lloyd is saying here, I don’t know if he’s actually managing the risk in a way

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that you should be when it comes to swing trading. You should be planning out where you’re going to get out before you ever get in.

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You should know if it crosses this threshold. I want to be out of the trade and I don’t get that feeling that he’s actually doing that here.

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So even if I’m holding a stock and it hasn’t been stopped out of before earnings, I’m selling out of it.

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I just wanted to reiterate that one more time now when it comes to long term positions, because I I’ve talked about before that I do trade in the long term as well.

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How do I handle the earnings in those situations? Well, for my long term positions, I’m looking to hold them for a very long time, for years, but I’m

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also very strategic about where I get into the matter. I don’t get into new long positions every year.

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Sometimes it it can be a couple of years before I add a new long position to My Portfolio. What I’m looking for is to take advantage of extreme sell offs, sell offs like what we saw in 2018

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at the end of 2018, what we saw in 2020, what we saw in 2022. Those are excellent opportunities to start new long term positions.

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But I also don’t start them all at once. I will start in very small positions and I’ll just add to them over the course of three, 4–5 months.

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And so I, I try to get them in these positions where a lot of these stocks have pulled back 40, fifty, 60%…

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And then I’m looking at companies that like Lloyd would call them good companies, good companies that I’m not, not speculative companies, but really good companies like your mega caps like NVIDIA,

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like Microsoft, like Apple, like Amazon, like Google. Companies that if the market bottoms, you know, these stocks have to lead the charge to the upside.

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But I don’t buy them all at once. And the reason why I wait for these extremes is because one I’m looking for, I hate to use the word

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generational pull backs, but pull backs that you’re not likely to see very much. And so the ones that that come to mind are like the ones I just said, the 2018, the 2020, the 2022,

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haven’t seen any in 23, haven’t seen any in 2024. So I haven’t added new long positions really there.

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Other moments you had the European financial crisis, you’ve had obviously the Great Recession that offered a great opportunity and then you had the .com bubble and there’s some stuff in between there

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as well. The the time where the US credit rating got downgraded.

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I mean, there’s been some great opportunities along the way, but you have to wait for them. Like right now I’m waiting for, you know, to get a significant sell off.

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I would love to see, I know a lot of people like cringe at me when I say this, but I would love to see a stock market pull back 30–40%.

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And I have the cash ready to be able to deploy at that kind of an opportunity. But it’s at those moments where a stock has been really vetted, the froth has been taken out of the

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stock. And yes, it can still keep going lower.

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That’s why I buy it incrementally over a long period of time. I’m not trying to time the bottom.

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But even if the earnings were to come out bad, often times at those moments there is a bad news, good news effect to where it’s like, well, we thought it could have been a lot worse.

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We’re going to go ahead and rally it. And so I’m waiting for those extreme long term inflection points in the market to be able to, to get

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long. And like I said I haven’t seen one since October of 2022 and before that it was June of 2022 but I haven’t seen it since.

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And yes long term trading is a waiting game for at least it is for me. I I’m not going to just constantly chase after things.

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If a stock drops 15–20% doesn’t necessarily mean that it lines up with the overall market being down 15–20%.

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And if the market was to start dropping 20%, that stock that just dropped 20% could easily drop another 30 or 40% because typically there’s a you know, a lot of the stocks that we target are the

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ones that we’re passionate about. They have a little bit higher of the beta than the overall market.

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Finally, the the last thing I guess you could do if you were insisting on holding your stocks to earnings, which this is not something I do and I don’t even think it’s the best approach to some

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people will buy puts out of the money against their position just in case there is a 15–20% sell off. They can help mitigate some of the the fallout that’ll come from their position getting hit by an

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earnings report. People will buy puts that are way out of the money so that they’re very cheap.

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But still it’s going to hurt your position to some degree even if the stock goes up from the earnings report because you’re going to lose the money that you put towards those puts.

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So there’s not a perfect solution to this. The most perfect solution for me from a swing trading standpoint has always been to not hold stocks

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through earnings. If you enjoyed this podcast episode, I would encourage you to leave me a five star review on

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whatever platform you’re listening to me on. Those do really mean the world to me and send me your questions.

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I want to hear from you. I want to hear what you have to say.

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I want to hear your stories and your background. Keep sending them to me.

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You guys have provided me with some great content over the years and you guys continue to provide me with great content.

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So keep keep sending them to me because I guarantee you there’s other people that have had, for instance, in the case of Lloyd Christmas here has had that same exact questions like they’re getting

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currently ripped apart by this earnings season. Lloyd Christmas is not the only person suffering at the hands of this market right now.

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And make sure to check out Swing Trade in the-stockmarket.com. Thank you and God bless.

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You have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.