Earnings season used to be a time I didn't necessarily look forward to as a swing trader.
On the one hand, I've always viewed it as great for bringing volatility and movement to the markets -- which traders thrive on for making money.
On the other hand, I was always uneasy about holding open swing trades overnight into a binary earnings reaction.
I learned this unease in my early trading years when I traded stocks for the very simple reason that my good-til-canceled stop loss order was meaningless in the event of an overnight gap through my stop loss level. I didn't have as much control as I'd like. In fact, in these situations, I had none.
It's taken me some years to warm up to the fact that I don't necessarily need this same mindset when trading defined risk options positions and spreads.
Yes, I can still lose money if a stock gaps through my risk management level (the level I predetermined at which I would close my losing position). But if my risk was defined -- meaning I know the maximum I can lose, and no more -- then an earnings gap in my face will only result in a loss that is more or less like any other loss I take.
I generally keep my positions sized so that if I take a maximum loss it only negatively costs me 1% of my total trading capital. And that's only if I suffer the maximum loss. They happen, but they don't happen very often. More than 50% of my losses are not total losses, often far less.
This is how I've taken control back with options. You can too.
Earnings season introduces opportunity. Let's not be afraid to step up to the plate to take some swings when our risks are defined. The wind is blowing out, so ordinary pop-flies will have a better chance of turning into home runs.
But we have to be in it to win it.
Sean McLaughlin | Chief Options Strategist, All Star Charts
