Things To Come
An update and a preview of our approach to Q2 earnings season.
No Exits This Week
We had no trade exits this week, but don’t worry, we’ll have some next week. We’ve got a few losing trades from the end of Q1 earnings season expiring next Friday, and hopefully we’ll have a winner or two from next week to join them.
Aiming For Bigger Winners
One of the data sources we’ve been using for earnings trades is Likefolio. This week, they put out the following table, showing the results of their picks over the last four quarters.
One point they made is that you can make money with a 40% win rate (I assume they’re average gain figures are for the underlying securities, rather than the options, but I’m not sure). In any case, two things I plan to do differently this quarter are
Place fewer, more selective earnings trades.
Aim for >120% gains on all of them. If we’re going to have a less than 50% win rate, let’s make sure we can make up for that with some big gains. That means going a little further out of the money on our trades.
Of course, when we lose on options trades, we often lose 100%; hence the need to make more than 100% on our winners if we’re going to have a success rate of less than 50%.
If You Want To Take Less Risk
For Smaller Accounts
You can follow our core strategy with any amount of money. Just buy equal dollar amounts of our top ten names, put trailing stops of 15% to 20% on them, and replace them with one of our new top names when you get stopped out. As we noted in our Top Names post on Thursday night,
Our top ten names from October 5th nearly tripled the performance of the market over the next six months.
That was the tenth top names cohort in a row to outperform SPY 0.00%↑ over the next six months.
For Larger Accounts
Consider using our Hedged Portfolio Method, available on the Portfolio Armor web app. Our hedged portfolios are populated by our top names, and have had a similarly strong run of outperformance recently.
Here’s an example. This was a hedged portfolio created by our site on October 12th, for an investor unwilling to risk a decline of more than 30% over the next six months.
And here’s how that portfolio performed over the next six months, net of hedging and trading costs:
That portfolio more than doubled the performance of the market—while hedged! You can see an interactive version of that chart here.
I’ve thought of packaging this as an ETF, but I’ve put off doing so because of the hassle of raising money to do it. But maybe I should rethink that given this kind of performance.