Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Trader Q&A - How Can I Hedge Against Known Unknowns Like Earnings Reports?

Schwab’s Randy Frederick discusses strategies to brace for events like earnings reports, elections, and more.

Click to show the transcript

Randy Frederick: Well, I'll jump on this one. And actually, I've written an article that's very much on this particular topic. One of the things - mistakes I think a lot of people make is they try to hedge unknown unknowns, which are things like that Lee was talking about earlier, which is spikes in volatility. We never know when a volatility spike is going to occur, and the big spikes happen to - tend to come from unexpected events, or like what we call black swan events.

Black swan by definition is something you don't know what will happen, when it will happen, or even if it will happen. And people spend a lot of time and lose a lot of money sort of preparing for that next big unknown, and it might be years before it happens, right?

So - but things like earnings reports, like election results, like FOMC meetings, we know the exact day and even almost to the hour of the exact time when these things are going to occur. So it's actually fairly easy to hedge against the events, because when you create a hedge, especially if you use option strategies, you have to keep them on. Every option has an expiration date, and if I know that a company that I own is about to announce earnings on Thursday, there's a very good chance that there's an option that expires the following day, on that Friday.

And putting on a strategy that will, if I'm concerned about a downside, maybe I buy a protective put. If I think there may be an upside move or maybe if I don't know which, and I just want to sort of hold tight through whatever volatility might occur from the earnings report, then I can put this strategy on. And if it's using options that expire the following day, then I can do it very, very cheaply.

So the main thing is - what I say is if you're trying to hedge a specific event, use the options that are the closest expiration immediately following the event. Then the whole process is very simple, very easy, and it's usually a whole lot cheaper, and then once the event's over, you don't have to worry about it anymore.

But the main thing is, and I think you know this by asking the question, is you can hedge the things you know when they're going to occur, even if you don't know the outcome. The things you don't know when or if they'll occur, frankly, very difficult. And I would encourage you to go look at the Schwab.com website, because I believe that article is still out there that talks about how to do that.

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
 
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

Important Disclosures

The material presented is intended for informational purposes only, that it should not be considered investment advice, and that past performance is not indicative of future results.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.

With long options, investors may lose 100% of funds invested. Multiple-leg options strategies will involve multiple commissions. Please read the Options Disclosure Document titled Characteristics and Risks of Standardized Options. Any opinions expressed herein are subject to change without notice at any time. Past performance data should not be construed as indicative of future results. Writing uncovered options involves potentially unlimited risk.

(0516-FLU0)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.