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Tackle Today: How to Fight the Earnings Dragon

January 21, 2021

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Equip yourself with these three weapons


The earnings announcement is like a bi-polar dragon. Some quarters he’s friendly and flies you to a pot of gold. Other quarters he’s evil and reigns fire down on your positions. Dumb traders walk into the dragon’s domain again and again, never quite learning that they don’t have to face him naked. Smart traders gird their loins and stockpile weapons to fight off his fiery flames.

Here are two of their favorite weapons: short calls and long puts.

Selling calls on a stock position creates a covered call. The premium received acts as protection against downward moves in the stock price. If you own a $100 stock and sell a call for $3, then you’re protected against a 3% loss in the stock after earnings.

Buying puts on a stock position creates a protective put. It acts as insurance and limits your exposure if things turn sideways. If you own a $100 stock and buy a $95 put for $3, your max loss shrinks from $100 to $8 ($5 plus the $3 put cost).

By combining both weapons, you create something even more powerful – the collar.

We teach about all three of these techniques in our Tackle 25 course. Have you taken it yet? Or are you still facing the dragon naked?


Chart of the Day

Collar Risk Graph

Here’s the risk graph of a collar position. Note how the downside risk is far less than long stock. Savvy traders who don’t want to exit before earnings and don’t want the open-ended risk can use it to protect themselves.

Video of the day

What is a Collar Option Strategy

The Collar is a neutral protective options strategy that involves simultaneously buying OTM Puts and selling OTM Calls against a specific holding in your portfolio (a long position).

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