Earnings Report Trading Strategy

Earnings Report Trading Strategy

Table of Contents

The income reporting season can be a great time for traders to gain insight into their equity investments and take advantage of short-term volatility.  Earnings report trading strategy is an important thing. However, there are some important considerations to remember before diving to make the most of this trading opportunity. Learn more about the three steps to follow when using an income report for trading:

3 Steps for trading with income Reports

Preparing for the reporting season means choosing a company that you want to concentrate on and conducting extensive market research before reaching a consensus.

  • Select a company to concentrate on

The first step is to select the stocks to trade during that period. Traders are encouraged to look at a handful of companies, perhaps stocks they know or already know, and ask for the date when their earnings will be recorded. Regardless of whether you trade or not, the best major stocks are worth a look at as their performance can affect the wider industry.

When deciding to buy a stock, traders need to understand that the relationship between profit margin and subsequent price response is not always easy. In general, better-than-expected returns are optimistic, but they don’t always lead to immediate price increases and vice versa. An example of this can be seen below. Wal-Mart’s strong results in Q3 2018 may not be of interest to market participants.

Wal-Mart's strong results in Q3 2018

The quarterly report is encouraging, but the results for the last quarter exceeded expectations. In fact, analysts are often even more concerned about the company’s future expectations because prices are predictive indicators and future profits are calculated at current prices.

With this in mind, it makes more sense for investors to withdraw from stocks that have had good results last quarter but have poor prospects for the future. Weak outlooks can seriously undermine the value of the stock, regardless of previous results, which is a fact that too often comes true during the return period.

  • Conduct your research

For an accurate stock survey, you need to analyze the stock’s expected return and compare it to the analyst’s expectations. Additionally, traders must follow past figures to understand how the market has reacted to previous messages. The reporting season is usually considered in terms of the meaning of the results for individual stocks, but the entire season can also provide important insights.

Information about a specific company is provided, but general topics can always be true. Headaches such as coronavirus, geopolitical tension, regulatory uncertainty, or cyclicality can all cause waves of anxiety across the sector if mentioned often enough.

Traders should investigate how such headaches affect one sector or stock compared to another. For instance, although the coronavirus outbreak has affected many industries, the Greek oil tanker operator in March 2020 was named Top Ships Inc. (TOPS) Supply-demand has increased due to demand for products such as cleaning supplies and paper products. This in turn led to an increase in trading volume and volatility. Earnings report trading strategy is an important thing

In the case of Brexit, for example, the impact of headwinds was also seen as the company delayed investments until orders were placed and the business environment stabilized after Brexit. Similarly, references to trade-related tensions often undermined a variety of sectors, from U.S. semiconductors to basic consumer goods, during the U.S.-China trade war.


Companies on the SP 500 list

Companies on the S&P 500 list


Although these issues may not be the only cause of negative returns (as seen in the TOPS example), the market-wide appearance may indicate prevalence and even greater downward pressure on forecasts and estimates. Therefore, traders should be wary of common complaints between companies. This is because such anecdotal evidence gathered can pose a definite threat to a wide range of indices, which can help inform broader macroeconomic strategies.

  • Develop and follow your trading strategy

Developing a trading strategy for the reporting season should include an approach to entry and exit, revenue targets, turnaround time, and risk management plans. Income statements are difficult and risky. In some cases, event trading may not fit your risk profile. Therefore, all open spaces must be properly secured and contain stops. However, volatility can create unique situations in which several specific strategies can be met.

When developing a strategy for the reporting season, traders should be aware that quarterly earnings can seriously skew current price developments due to their relative scarcity and importance. This puts traders into positions on large price fluctuations as implied volatility increases.

Regular investors run the risk of entry risk just before the report is written, as it is very difficult to predict exactly how the company will perform, not to mention the potential impact the company will have on the stock price. If implied, volatility affects the selected investment product, the impact on the position can be particularly severe because implied volatility remains high until the results are announced, but it is commonly known as ‘the IV crush’, which collapses rapidly after that.

IV Crush, as the name implies, is a case where the stock’s actual volatility drops significantly because the uncertainty has generally passed. Sudden changes in implied volatility are often accompanied by perceived volatility, but not always.

The imbalance between implicit volatility and realized volatility enables some unique trading strategies, such as hotlines and choking to take advantage of the absolute volatility of options contracts, or a short, stubborn strategy to exploit IV conflicts.

  • Straddles

Straddle means buying and selling the call (buy) and put (sell) option alternatives at the same time with the same strike price (a fixed price that the option holder can buy or sell) and the same expiration date. In the case of profit, the trader can delay issuance, and if the share price deviates from the strike price by more than the total premium, then the share price may rise or fall to profit. This could make the route line a lucrative alternative if traders believe that their absolute volatility is high but the direction of movement is uncertain.

The short schedule includes short call and futures options with the same strike price and expiration date. This move is often suitable for an IV crash where you think the price won’t move too much over the duration of the options contract.

  • Strangles

Strangles is like straddles and can even have long and short roads. However, the straddle has the same strike price for the call option and the free option, but the strike price is different for the strike price. If a trader believes that the stock is more likely to move in one direction than the other after a return report, but the situation is in another address and you are still seeking protection, alienation can be a lucrative alternative.


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