There are many options strategies that you can use to trade around company earnings reports, and they each require certain share price moves following the earnings report. We have therefore looked at the price movements of this reporting period – looking for trends that we can use to trade.
Up until and including last Friday, fifty-six major stocks that we look at have reported their earnings. Twenty stocks have closed lower following their reports (35.7%), four stocks closed flat (7.14%), and thirty-two stocks have closed higher (57.14%).
The average move on the day of the report is for a 1.05% rise. However, in absolute value terms (removing the negative symbol to make all values non-negative) the average move following an earnings report is a 3.69% rise. You can consider the absolute value change to be the average magnitude of a move in either direction.
A three to four percent move in either direction seems about right from experience. This does match the approximate move that you would need to profit from a debit strangle given the implied volatilities that market makers charge on options around a company’s reporting date.
So how else could we determine if we may see enough movement to profit from a reporting trade?
If we look at the post-report performance of a stock on a sector-by-sector basis, we see that some sectors appear better for a reporting season trade than other. Keep in mind that some sectors may be influenced by a very large move for a single stock – so look for sectors that have seen many reports, in addition to large moves. It is also worth noting that previous results do not dictate future results.
This should hopefully help give you some ideas of stocks that you can target with a reporting season trade. It is also important to check the implied volatilities of a stock’s options moving into the report – and to simulate the effects of a share price move and drop in volatility on any reporting trade you consider.
If you would like some more information about constructing a trade for a company report, you can find more information by clicking this link. You can find an example of a reporting season trade at this link.
If you would like to help to discuss or place a trade, including a reporting trade, please don’t hesitate to contact your TradersCircle adviser on 03 8080 5795 or at advisers@traderscircle.com.au