What is the Best Way to Trade Earnings? Your Guide to Quarterly Earnings Report Trading Strategies.

By: Montana Timpson

Quarterly earnings seasons are some of the most anticipated points for the market during the financial year. They refer to the months when quarterly earnings reports are released — periods ripe with investor speculation, analyst predictions and the opportunity for big market moves.

Defining Quarterly Earnings Reports
A quarterly earnings report is a quarterly filing made by public companies to report their performance, including four key financial components: the company’s income statement, its balance sheet, its statement of cash flow and projected forecasts. Quarterly earnings reports provide investors with an overview of sales, expenses, and net income for the most recent quarter. Financial metrics often include net income, net interest margins, earnings per share (EPS) and earnings from continuing operations. Some quarterly earnings reports include a brief summary and analysis from the CEO or company spokesman, and some may feature comparisons to previous quarters or annual earnings reports. 

In the United States, all publicly traded companies are required by the Security and Exchange Commission (SEC) to file earnings reports quarterly. Each earnings season begins one to two weeks after the last month of each quarter, meaning earnings often roll into January, April, July and October. 

Quarterly Earnings Reports for Professional Traders
Quarterly reports are highly anticipated by professional traders as a measure of profitability of a company, often most highly reflected in a company’s earnings per share (EPS). Analysts use forecasting models, guidance and other fundamentals to determine estimated EPS, and the market uses these estimates to determine how a company will perform when the earnings are released. Earnings predictions tend to drive stock price action around the earnings release dates, as traders and investors focus on how closely the reported earnings match the consensus estimates.

Knowing the importance of those estimates can help investors manage through quarterly earnings results. A company’s ability to hit earnings estimates is important to the price of its stock. If a company exceeds expectations, share price often increases. If a company falls short of expectations, or just meets them, price often decreases, or barely moves.

Earnings Report Trading Strategies – Before Earnings
One earnings trading strategy rests on history and is predicated on buying stocks before earnings reports are released; in this buying scenario, professional traders look to target securities that have consistently beaten bearish estimates for several recent quarters. This strategy requires speculation that the trend of exceeding expected earnings will likely continue, and traders adopting this strategy often look to buy stocks or call options before earnings reports and sell on the news when the price jumps.

In a similar vein, if a trader believes a company won’t hit expected forecasts, they will often short the stock or buy put options.

Earnings Report Trading Strategies – After Earnings
Post-earnings strategies would involve evaluating price movements considering both earnings reports and forecasts. Traders may take a view that a stock may gap and extend or gap and reverse and will adjust their trades accordingly. Traders with a bullish view may buy stock or call options. Traders with a bearish view may short stock or buy put options.

For more professional trading insights, check out Lightspeed’s Active Trading Blog. For additional references, guides and resources, view our Trading Education Center, featuring a comprehensive glossary for professional traders, and register now for our next live webinar.

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Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the users’ independent analyses taking into consideration your financial circumstances, investment objectives, and risk tolerance.

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