Protecting Your Portfolio During MicroStrategy Earnings: A Smart Approach

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Earnings season is one of the most volatile times in the stock market. A company’s earnings report can send its stock price soaring or plunging overnight. As a trader, knowing how to protect your portfolio during earnings is crucial. Today, we’ll discuss how to navigate MicroStrategy’s (MSTR) earnings announcement while minimizing downside risk and optimizing income potential.

The Importance of Protecting Your Portfolio on Earnings Days

There are four critical days each year when you can take control of your risk exposure: earnings days. These events bring significant uncertainty, and while you may anticipate a stock moving in a particular direction, there is no way to be certain.

MicroStrategy is a particularly volatile stock, and its earnings reports can lead to dramatic price swings. While the stock may surge higher, it also carries a substantial risk of dropping significantly. Therefore, it’s essential to implement a strategy that prioritizes risk mitigation.

Understanding Asymmetric Risk

One of the key factors in trading earnings is understanding asymmetric risk. The risk of a stock declining significantly is often greater than the risk of missing out on potential gains. This means that traders should focus on protecting their portfolios against downside moves rather than just hoping for an upside breakout.

For example, MicroStrategy’s stock was trading at $344, and the 330-strike options still carried a $565 premium per contract with only two days left until expiration. This suggests that buyers are still willing to pay for the possibility of an upward move, but it also highlights the importance of setting up a defensive strategy.

How to Calculate Expected Moves

To assess risk accurately, traders use an expected move calculation. The formula involves adding the at-the-money call and put premiums together and multiplying by 0.8 (a factor that accounts for implied volatility adjustments). Here’s how it works:

At-the-money Call Price: $11.35
At-the-money Put Price: $11.35
Total: $22.70
Multiply by 0.8: Expected move is around $18

This means that MicroStrategy’s stock could reasonably move up or down $18 from its current price based on market expectations.

Implementing a Defensive Options Strategy

With this expected move in mind, the goal is to ensure adequate protection against a downward move. Here are the key steps:

Sell Deep In-The-Money Covered Calls

The 330-strike covered calls provided around $1,535 per contract in premium.
This setup offers a cushion against declines, ensuring some downside protection while still collecting premium income.

Adjust Positions Based on Stock Movement

If the stock drops below $330, the position is already protected.
If the stock moves higher, a roll-up strategy may be implemented to capture additional gains.

Evaluate Option Strike Prices

Selling at-the-money options (e.g., 345-strike) could yield $1,122 per contract in juice but offers less downside protection.
Selling deep in-the-money options (e.g., 310-strike) provides $3,297 in protection but less juice.

Why Focus on the Downside?

If the stock surges upward, traders can easily roll their covered calls higher and maintain profitability. However, if the stock declines $100 or more, an unprotected position could suffer significant losses. That’s why prioritizing protection on the downside is a more strategic approach.

Final Thoughts: Be Ready for Earnings Volatility

With earnings announcements, uncertainty is inevitable. Instead of taking unnecessary risks, traders should focus on:

Identifying expected moves using options pricing.
Selling covered calls strategically to balance income and protection.
Avoiding speculative trades without defined risk management.

By following this approach, you can navigate earnings season with confidence, ensuring that your portfolio remains stable regardless of market volatility.

Life-Improving Tips for Smarter Trading

Stick to a Plan: Establish a clear trading plan and follow it consistently to avoid emotional decision-making.
Manage Risk First: Always prioritize downside protection before focusing on potential gains.
Use Expected Moves: Calculate expected moves to make data-driven trading decisions.
Stay Disciplined: Avoid speculative trades without defined risk management strategies.
Keep Learning: Stay informed about market trends, options strategies, and risk management techniques.

Frequently Asked Questions (FAQs)

Q: Why is earnings day so risky?
A: Earnings reports can lead to unpredictable stock price swings, making it crucial to manage risk properly.

Q: How does selling covered calls protect my portfolio?
A: Covered calls generate income through premiums and provide downside protection when sold in-the-money.

Q: What if MicroStrategy’s stock rises after earnings?
A: If the stock surges, you can roll your covered calls higher to maintain profitability.

Q: How do I choose the right strike price?
A: Consider expected moves, your risk tolerance, and how much protection you want against declines.

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Conclusion

With earnings announcements, uncertainty is inevitable. Instead of taking unnecessary risks, traders should focus on:

Identifying expected moves using options pricing.
Selling covered calls strategically to balance income and protection.
Avoiding speculative trades without defined risk management.

By following this approach, you can navigate earnings season with confidence, ensuring that your portfolio remains stable regardless of market volatility.

Protecting Your Portfolio During MicroStrategy Earnings: A Smart Approach

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