Earnings Season Strategies

by Ian Harvey


Earnings season strategies are all important when it comes to profiting from earnings predictions. These predictions made by Wall Street analysts are one of the main drivers of stock price action around the earnings release dates; and companies are judged by their ability to beat market expectations. These consensus estimates, in relation to the actual reported earnings, is one of the main points of focus for investors and traders.

There is usually plenty of potential volatility that may occur before and after an earnings announcement; and an understanding that stocks can fall on good earnings and rise on poor earnings is important when establishing or managing a stock or option position.

Playing company earnings to your advantage, before and after reports, can be quite tricky most times as earnings are very difficult to predict, but the team from Stock Options Made Easy (S.O.M.E) have managed to excel in being able to profit during the earnings season, as can be seen by the results.

There are several strategies that can be employed to take advantage of earnings reports that should be adhered to, and S.OM.E. is well in front when adopting these methods. Bear in mind that options trading is the focus when discussing these strategies.

One of the major issues to contend with is “doing in-depth research”, and acting on this analysis of what is known, as well as being alert for unexpected information, to appropriately to make an informed decision before executing a trade.

Types of Strategies to Employ

Earnings announcements will cause option prices to fluctuate; and the extent of that fluctuation will greatly depend on whether the company misses, meets, or exceeds, the analyst’s estimations.

If the report is favorable then the stock will usually move upwards; and vice-versa if the stock comes in below expectations. Keep-in-mind that this is not always the situation, as mentioned earlier.

As already stated, volatility, due to earnings, can be very useful when trading options; option prices are more reactive to volatility and offer lower capital risk.

Trading options allows you to play an earnings report in any direction…..

  • Call options let you profit from a rising share price,
  • Put options will gain if prices fall, and
  • Buying both puts and calls gives a high probability that one side will be a winner…… employing spread strategies…… lowering the trade costs and increasing the potential for profits.

Understanding the health of a company, when reporting, can also provide direction that might be expected of …..

  • A company that routinely exceeds expectations quarter-after-quarter is probably doing something right.
  • Conversely, a company that consistently falls short of estimates for several consecutive quarters likely has problems.
  • Managed earnings by companies that might try to boost earnings by recording revenue in the current quarter, while delaying recognition of the associated costs to a future quarter, need to be recognized to be able to assess that quarterly numbers match up with estimates.

Analysts' estimates tend to be wide and varied in regard to company estimations. Therefore it is a good idea to find out which analysts have the best track record and use their forecasts instead of the consensus.

If an option trade is going the wrong way after an earnings report – check as to why the company missed before opting out. If the miss is more a function of the estimate than its corporate performance, then look beyond the consensus numbers and consider increasing the trade that you still have.

Consideration of the amount of capital used for each option trade can be determined by how sure you feel about the analysis you have undertaken.

Not every trade is applicable before earnings.

Remember to take a disciplined approach to trading. Display confidence, patience and realism in your trading strategy.

Technical Analysis Tools and Considerations

  • Comparing implied volatility to historical volatility,
  • Chart patterns,
  • Overall trend,
  • IV Percentile,
  • Prior earnings announcements,
  • Expected moves, predictions -- support and resistance,
  • Open interest and volume – particularly for options trading,
  • Volatility,
  • Overall market view
  • Put/call ratio,
  • The Greeks,
  • Market sentiment,
  • Price action,
  • Moving averages,
  • Sector or similar stock earnings reactions,
  • News items - takeover rumors, change of management, and
  • Previous options activity.

In Conclusion

Set up a watch-list of stocks and use these for your trading purposes, as you will be already familiar with them and should have been constantly updated, to help you make a decision in regard to option direction.

Always know when earnings are going to be announced on a stock for which you wish to place an options trade, and make sure your risk is managed.

Understand that trading earnings can be more unpredictable than normal. Therefore, minimize the risk and aim for high probability setups using the unique combinations of analysis, strategies and trades.

Besides using a standard watch-list at Stock Options Made Easy, in general, we analyze prior earnings moves; combine this with technical analysis methods, and intuition from years of experience of trading earnings seasons before recommending a trade.

Best of Trading,
Ian Harvey
Director of Stock Options Made Easy


”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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