Poker is a game of skill that still entails an element of chance. It is beyond your control, but occasionally the weakest hand wins.
The fact of the matter is that losses happen in poker no matter how high your skill level. The true professional understands the nature of the beast and manages accordingly.
The same is necessary for those trading options based on companies reporting earnings. The professional earnings trader recognizes that losses are part of the territory and those losses can be substantial.
When a loss happens, you absorb the punch but you move on to the next trade. There is no time to dwell. Over time your winners will greatly outpace the losers and one never knows when the next winner will arrive. More importantly, no one knows when the next 600% gainer will come.
Investors often misunderstand what risk means in the market. For example, many will look at the idea of buying options in advance of an earnings report and scoff. I believe a commenter to one of my articles here stated that trading options on earnings is too risky.
Ha! Now that is funny. My own belief is that taking risk on trading options based on earnings is no more risky than owning stocks in general. The difference — and it’s a doozy — is that owning stocks right now is a joke.
Over the last two years stocks have been treading water. Yes, they do go up and down providing ample trading opportunity, but the reality is that stocks do not offer sufficient return for the risk that you are taking.
I’d much rather risk losing $500 on an earnings option trade with a system that can produce a $5,000 winner than sit in a static stock market that is likely to move sideways or worse over the next decade.
The bottom line is that risk should be embraced. It is what allows for trades to be hugely profitable, but it does not come for free. When a loss occurs you need to have the discipline to persevere.
This week’s Stone-Cold Earnings Trade Lock of the Week is a large grocery chain that has done nothing but exceed expectations over the last year. Shares trade for a very low valuation relative to expected earnings growth. I expect another solid report and shares to gain as a result. This is a call buying opportunity that could double in value in less than 24 hours of trading time.