Trader Meetups (Part 12)

I have spent the last two posts discussing a new meetup I attended on February 28.

Consistent with the “trading is like an ATM machine” theme, the meetup presenter JD talked quite a bit about earnings announcements as another “slam dunk” approach to option trading.  He talked about the volatility crush that occurs after earnings and why this is a windfall for anyone applying short option strategies.  JD represented no significant effort required to place these trades:  even if the market moves against, you will likely profit.

I have listened to discussion by many about trading earnings announcements either directionally (verticals) or nondirectionally (time spreads before or credit spreads through the event) and only once have I heard a trader claim to have consistent success.  She attributed her success to extensive time spent studying option chains to see if she could place trades for a requisite profit potential based on past earnings moves.

JD seems to just slap the trades on haphazardly and collect profits.  If trading were easy then wouldn’t all market makers (and associated firms) be out of business already?

At best, earnings plays should be treated as speculative:  trades to be done in extremely small contract size.  Regard them as lottery tickets.  They will not pay your mortgage or recurrent living expenses.  This is all about risk management and JD discussed none of it.

With regard to risk management, on two brief occasions JD did mention keeping a tight stop near the entry level.  He never went into depth about what a portfolio can actually lose by implementing this stop-loss over many trades.  The educated trader will tell you that tight stops, which imply low risk, aren’t necessarily a good thing because more often than not due to the market’s random volatility, they will get hit for small losses.  One may suffer death by a thousand cuts just as one may suffer death by one huge accident.

I will discuss this meetup further in the next post.