Last week, my colleague Chris spoke about the new quarterly reporting season for US and UK banks. Since then, a few of my clients got in touch to ask how investors can protect themselves ahead of results. My response: don’t just protect yourself on the UK Index , benefit. Here are some of the options traders have.

One thing many investors should always keep in mind is what happened to UK Banks’ share prices the last time they reported quarterly results. Here you can look back on the previous quarter (if you want to see the latest trend) or, alternatively, on the day reactions to Q2 2017 results, if you want to avoid the seasonality factor.

Barclays shares fell -1.4% on 26 April when Q1 results were announced, and -1.7% on 28 Jul 2017 when previous Q2 earnings were released. Similar picture from Lloyds: shares fell -1.7% the day of Q1 results (25 April) and -2.3% last year (27 Jul 2017).

Shares of HSBC and RBS did rather well a year ago (+1.8% and +2%, respectively), but their Q1 results this year produced share price reactions that also disappointed investors (-1% and -1.5%).

Does the Q2 picture look equally bleak for banking shares? Should investors expect similar price reactions this time around? Keep in mind, historical results aren’t a perfect indication. Traders needs to look at broker previews, examine dividend pay-outs and the overall trading environment to get the full picture. But assuming they expect Bank shares to go down on the day, what’s the next step?

The knee-jerk reaction would be to run for the hills and avoid trading banking shares completely. But avoiding the volatility means missing out on potential trading opportunities, when prudent risk management can shield smart investors even from the most drastic Q2 earnings report. Here are the steps investors can take:

• Enter short positions on the expectation of losses. If you are convinced and analyst consensus backs up opinion that shares will go down, short-selling banking stocks seems like a great opportunity to benefit.
• For those investors who are already in a Long position on any of the Banks, the prudent action would be to make sure that their stop-losses are properly adjusted (not too close, but not too far). If the banks release poor quarterly reports, it’s important to protect your investments beforehand, as the markets can move instantaneously as the opening bell rings.
• Finally, don’t concentrate just on the day of the report. Bank shares may fall on the day of the report, but bounce back the next day or the day after. Buying fundamentally sound stocks at a post-results bargain price and then profiting when the shares correct could also be a great trading opportunity.

Have a look at this chart for HSBC’s share price reaction on 4 May (when Q1 results were released). Shares fell to the low of 697p on the day of the quarterly report, but made up all the losses the very next day and rallied back to the high of 738p in 1 week. Not a bad result for investors who took advantage of a bargain trading opportunity.

If you are interested in finding more exciting tradable opportunities like the one with HSBC I described above, go ahead and get in touch with me. It’s pretty simple, just click here to access our research and trade ideas and we can discuss how Bank shares will behave when they report next time.

Dan Masters, Trader at Accendo Markets, 13 July 2018