It's the start of earnings season, and you are ready for the magic.
Microsoft announces earnings today. And Amazon and Google both announce earnings tomorrow.
You have reviewed all the earnings forecasts and estimates, checked the history of positive and surprise earnings, and you are ready to win big.
You have all your charts at hand.
You have moved some money into your options trading account, and you are ready to go.
Everyone tells you that this is easy money, so long as you have the right technical approach to spot the likely winners and losers.
But this hasn't ever really worked for you in the past.
That's because all of your methods are wrong.
Fortunately, I've figured out a better way to trade earnings season.
In fact, I have two...
Even These Two Gambling Approaches Are Better Than Trading Earnings Season
Okay, I lied.
I'm not going to tell you how to trade earnings season.
I'm going to tell you why you shouldn't.
But let me first debunk the allure of trading options this earnings season by showing you two terrible alternative approaches that are nevertheless better.
Here's how to get started: Take all your charts, graphs, and tables, and throw them in the trash. Transfer the money out of your options account, and get ready to gamble it.
Now you're ready to try the two gambling approaches. Approach No. 1: Head to the nearest horse racing track. When you arrive, grab a nice cold beer and a racing form.
Divide your stake by the number of races, knowing that most tracks have either eight or 10 races a day. For our example, we will use 10 races, so divide by 10. If you had $25,000 earmarked for earnings season trading, your stake for the day would be $625, so that's $62.50 per race.
Pick a favorite and then add up the number of horses going off at over 15 to 1 odds in the race. Bet the winner to win and the others to show in equal amounts. The favorites will win about a third of the time, and if you hit a few of the long-shot show bets, you will go home a winner on the day.
If you don't feel like spending the day at the racetrack, then try Approach No. 2: Go to the nearest casino. When you arrive, walk straight to the baccarat tables.
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Bet the banker and only the banker, and play $10 a hand. When you win, let it ride until you win five in a row. The objective here is to play at least 200 hands. In 200 hands, there is something like a 95% probability of a six-hand winning streak. If you hit one and split the remaining hands 50-50 (the odds say it will be more like 48-52, but we are hoping for a little luck here), you go home a decent-sized winner.
Then, rinse and repeat...
Whichever of the two approaches you take, keep doing it every weekend until you have lost your stake or earnings season is over.
If you had a little bit of luck, you are somewhere around breakeven.
If you had a lot of success, you have more than you started with.
Worst case, you lost all of it.
Odds are you lost some of it. You may have lost 2.5% of your intended trading stake, which is a far more pleasing result than you would have likely experienced if you had attempted to trade the earnings season using options.
You have gotten your action fix for the quarter, had a lot more fun, and probably have more money left. Put whatever is left back in the bank until the next earnings season.
Here's Exactly Why You Shouldn't Trade This Earnings Season
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Trading earnings season is a unique form of insanity.
Think about what you are doing when you trade earnings using options. You are making a leveraged bet, a guess about the accuracy of some Wall Street analyst's guess about the profits of a giant corporation over a three-month period of time.
Furthermore, your bet is highly dependent on what the psychological soup of market participants decide they feel about the accuracy, or lack thereof, of the collective group of analysts' guess.
You can be dead right with your guess about his guess and still lose money if the majority of your fellow traders decide they feel differently about his accuracy.
Now consider who you are trading against when you trade options.
Option market makers and other statistically minded option traders are using super high-speed computers to price options and execute their trades. Some of them have so much high-end computing power they have to install special air conditioning systems because of the heat they generate.
If you don't think they adjust their pricing models during earnings season to pick the pockets of retail traders trying to make money off their guess about a guess, you are sadly mistaken. I have had more than one expensive night of cocktails and dinners in Rush Street bars in Chicago, courtesy of professional options trading friends who had picked the pockets of underpowered retail traders clean during the week.
The options you are trying to trade are priced by them to ensure they make money and you don't. Your odds are worse than at the baccarat table, though at least they will throw in some free drinks and a steak dinner every once in a while.
Instead of Trading Options, Do This
I want you to search the Forbes 400 list of wealthiest people in America.
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Look over the entire list and find me the individual who got rich trading options based on their guess about someone else's guess about the short-term results of a corporation.
There are none there. If there were, I would spend all my time and money learning to trade earnings season.
There are some investors on the list. Warren Buffet makes the list. So does Carl Icahn. Ron Perelman and David Tepper are on there. Stephen Schwarzman of Blackstone makes it, as does Henry Kravis of KKR & Co. My personal investing hero, Andrew Beal, is on the list of the richest people. David Rubenstein of Carlyle Group is one of the richest of the rich, as is Leon Black of Apollo Global Management. Sam Zell, the grave dancer of the real estate markets, is on there as well.
These folks all have something in common: They don't trade on guesses about guesses. They buy companies and assets at bargain prices and hold them until they can sell them at inflated prices. That is the proven way to get rich in the markets, so it just makes sense to me to study what they are doing and learn to emulate the methods they used to get rich. Get your kicks at the track and the casino, but learn to invest like the people who actually got rich investing.
The only people who consistently make money off the flurry of options trading around earnings season are the option market makers and the guy who sold you the foolproof earnings season trading system.
Now that we have settled that, let me drag out my well-worn soapbox for a minute or two and discuss the real costs of earnings season.
The intense short-term focus of Wall Street leads managers to make decisions in pursuit of short-term objectives that harm the long-term future of their corporations.
These activities may include stock buybacks at inflated valuations that harm long-term shareholders and burn cash that could have been used for long-term growth investments. They may also include merger and acquisition activity that temporarily pumps the bottom line but doesn't add long-term value to the company.
Money is made by bookies, brokers, and market makers in the short term. Investors get rich in the long term.
Are you trying to make the bookies rich, or get rich yourself?
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The post How to Trade Amazon and Google Tomorrow appeared first on Max Wealth.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.