Navigating Geopolitical Fears Through Earnings Strangles

You just experienced the worst market session of the last five months – all thanks to one of the most difficult trading trigger catalysts I can think of…

Geopolitical fears.

Yes, it’s true. From a market standpoint, geopolitical issues are the worst. Nothing else comes close.

These fears can’t be predicted by a chart, trend line or technical indicator. Instead, they’re reactions to the unpredictable outcomes of human emotion. That’s what makes them so impossible to trade.

You see, I’ve been through these periods before. It seems like the negativity, tension and uncertainty just won’t burn off.

Luckily, these periods don’t last too long. However, when you’re in the midst of one, such as the Chinese trade war fears we’re now seeing, it seems like it’ll last forever.

From a tactical trading perspective, what’s the right strategy?

There are two answers…

First, it’s balance. As a general rule, for every two long positions that you have (which is honestly the maximum number I’d like to carry during times like these), you simply must have a corresponding downside hedge.

In The War Room, we’ve been using the ProShares UltraShort QQQ, which moves at a rate of two times the inverse of the PowerShares QQQ ETF, which covers the stocks in the Nasdaq-100 Index. So say the PowerShares QQQ ETF is down 2% on the session. At the exact same time, the ProShares UltraShort QQQ would move up 4%.

Over the last two trading sessions, we’ve used ProShares UltraShort QQQ calls as our safety net, offering us the ability to extract value from hedge plays in times of falling prices. In dangerous geopolitical market environments, like right now, you need crash insurance – and owning these calls overnight and into the next day’s open has been the right move.

Second is earnings strangles. Taking a page from the balance note above, environments like these lend themselves perfectly to our earnings strangle strategy.

With this strategy, you own exposure to both sides of the same stock (yes, that means you own both calls and puts), centered on an earnings event.

The volatility from earnings coupled with the volatility from the geopolitical mess grants an ideal and safe opportunity to profitably get through these temporary flare-ups. Up market or down, it doesn’t matter. As long as you’re seeing movement in either direction, you’re in good shape.

Cisco systems daily

Action Plan: In the War Room, we just implemented this earnings strategy on Cisco Systems (Nasdaq: CSCO), which reports after the close on Wednesday, and Macy’s (NYSE: M), which reports before the open on Wednesday.

Leading up to each earnings report, if this volatility continues, we may have profits in hand. If so, we could take the gains and safely be out. Or we could hold for more gains into each earnings reaction. Either way, we’re covered. No matter whether we see more violent selling or a huge correctional bounce, we stand to profit. And right now, in this environment, that’s exactly the type of position we want to be in.

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