Investing During Earnings Season
Earnings releases can be significantly hyped in the media. The first few weeks of each quarter are filled with lots of speculation and discussion over what might happen and analyses after the fact. In addition, stocks can be significantly impacted by a company's quarterly earnings report. However, it may not be immediately obvious how earnings season can potentially benefit an individual investor. Overall, trading earnings statements will come down to personal choice, but large swings in stock value can create many active trading opportunities. To help this approach , we'll explore the following:
• The potential benefits of trading earnings
• Risks to consider before you trade earnings
• How to trade earnings season
• Strategies for trading earnings
There is a lot of covers, so let's get started.
The potential benefits of trading earnings
When a company beats its earning forecast, it can see a change in stock price.
If able to time the market correctly though it's nearly impossible, a trader could see significant profits from this situation. While 2022 saw a large downturn in the bear market, 69% of S&P 500 companies still beat expert estimates for the third quarter. With so many companies able to outperform expectations, there are a number of potential trading opportunities that informed investors can discover.
Risks to consider before earnings
It is vital to remember that while there can be significant gains, there are also a number of stocks that suffer big losses. Significant losses aren't the only negative to consider. Many investors know that just because an earnings statement is released does not mean that a company's stock will rise. Impressive earnings releases are not a guarantee of impressive gains.
Another significant disadvantage to consider is that it is impossible to always accurately forecast the results of a release. While the analyst community can provide some insight, there is no foolproof way to determine how investors will react. In addition, it can be incredibly difficult to manage risk if your trade strategy is based on a single event.
Trading during earnings season
If trading around an earnings announcement is the right strategy based on analysis and experience, there are a couple of steps to consider in order to begin.
Forecast
First, traders will need to determine which direction they think the stock price will go. This includes two assessments. The first is looking at the information that will be included in the announcement, and the second is determining how that information compares to the market consensus. There are a number of tactics that can be used based on if the price shifts up, down, or doesn’t even move much at all. This forecast is essential to help narrow the appropriate strategies to employ. The strategy is also impacted by how general market momentum can impact individual stocks.
Monitor
Investors should actively monitor company-related news and the EPS calendar before and after an earnings release for any companies that they already have an open position in, as well as those they would consider trading. Earnings statements can reveal a lot about a company’s underlying fundamentals and change expectations for stock performance as well as market reaction. The earnings of a specific company aren’t the only ones to pay attention to, however. Similar and related companies can have a spillover effect on others. Larger companies in a sector can impact similar, smaller businesses, making it essential to reassess positions and strategies based on new information.
Strategies for trading earnings
While it is important to remember that market timing can be very difficult and risky, there are positions that can be used to trade around an earnings announcement. The most basic is to buy or sell the stock. Consider buying if the price is expected to rise and selling if it is expected to fall. Shorting involves significant risk and should only be done by experienced investors.
Options
Call and put options can be used to replicate long and short positions. If the price of an underlying security is expected to rise after an earnings release, an investor can purchase a call options. The alternative is to purchase a put contract if the underlying stock’s value is expected to drop.
Traders who want to trade options ahead of an earnings announcement should always consider the Greeks and implied volatility. Analyzing the periods of time before an earnings season can help show if the implied volatility historically increased ahead of the release. Understanding this impact can help traders better analyze potential profits or losses.
Advanced options strategies
Options are often used by traders to hedge and reduce the impact earnings announcements can have on their existing positions. For example, if a trader is in a long position and expects a stock to drop after an earnings announcement, purchasing a put option may offset some of the expected volatility as the put increases in value as the stock decreases in value.
There are also advanced options strategies that can be implemented depending on an investor's sentiment before an earnings announcement, including multi-leg strategies, such as:
• Straddles
• Strangles
• Spreads
• Collar
Key Takeaways
Trading around earnings announcements can offer unique opportunities for well-informed and experienced traders. Earnings announcements can impact the price and volatility of a stock, which can provide trading opportunities. Analyzing a company's past performance and comparing it to analysts' estimates for the upcoming quarter can provide insights into potential market sentiment. Trading options based on earnings reports are used by many experienced investors, not only to hedge long positions they may have, but also to attempt to also attempt to take advantage of resulting market volatility.
Find opportunities with moomoo
News and releases about when companies will report their earnings is readily available when you use moomoo. Learn how to read an earnings report and get real-time earnings information, updates, live calls, and analyses all in the palm of your hand. With advanced features and a curated set of earnings analyses, this professional-grade trading app offers the in-depth tools you need to build a well-informed strategy.
Download the app today and experience the difference between an app designed for serious traders.
Sources:
https://www.bloomberg.com/news/articles/2022-02-03/amazon-poised-for-biggest-ever-market-value-gain-in-wild-swing
https://www.wsj.com/articles/tesla-shares-jumps-premarket-after-record-earnings-11650539385
https://www.cnn.com/2022/11/10/investing/premarket-stocks-trading/index.html
Disclosures:
Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.This article is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions.Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options (bit.ly/optionsdisclosuredocumentfull) before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.