I know I promised Vertical Spread Adjustment strategies as the next topic. I’m going to delay it one week and at the request of the people who asked, instead present a written version of the presentation I delivered last weekend in Denver at the Trading Trainer Mastermind. At the time I was putting my PowerPoint together, we were just entering earnings season. Given the daily market behavior over the last week has every day behaving like an earnings announcement, it appears an appropriate time to share this hedging strategy.
This past earnings season, I’ve heard a lot of questions about how to best hedge a long trend continuation position thru an earnings announcement. In my mind, carrying this type of trade thru earnings transforms it into something considerably more speculative than when the trade originated. This kind of transformation, in general takes form in the expansion of risk. Since the likelihood of a significant move against the position is large, the amount of capital originally allocated to the position is likely no longer appropriate. To carry a trade thru earnings on a stock that has a history of significant moves, requires the trader either to reduce capital and/ or hedge against the original position.
Along with just about every Apprentice, I bought into EL when it followed thru on the Reactive Template on April 14th.