Even a small deviation from earnings expectations can have a large impact on a stock’s share price.

Are You Ready for Earnings Suprises?

Earnings estimates are a sensitive indicator, so the slightest deviation from expectations can have an outsized impact on share price.

After you’ve carefully considered the probability that a company will meet its expectations, you can choose an earnings season strategy based on how you think a stock will perform after the company announces its earnings for the quarter.

4 Tactics for Earnings Season

  1. Buy or Short the Stock – If you expect a stock price to rise or decline in response to the company’s earnings announcement, you may consider buying or shorting the stock prior to the announcement. Alternatively, you could add the stock to your watch list prior to the earnings report, then buy or short the security immediately after the report is released to capitalize on upward or downward momentum.  You take on more risk if you act prior to the earnings announcement, but you could potentially see a higher profit as well.
  2. Use Options as a Hedge – In general, hedging can help limit risk in your portfolio. If you’re worried about the impact of an upcoming earnings announcement on one of your positions, you can consider buying an option as hedge. The precise strategy you use would depend on your specific position. For example, you could consider buying a put option on a stock with an upcoming earnings announcement. Buying a put can help minimize losses if the stock price falls; however, if the stock price rises, your gain could be reduced by the price you paid for the put.
  3. Automate When Possible – Automating trades can help reduce the emotional concerns that might cause you to deviate from your trading plan. Advanced orders  allow you to create conditions to automate your trading decisions.  Whether you’re long or short a stock, a stop-on-quote order can be an effective way to manage your entry and exit points by setting a floor or ceiling that would automatically trigger a market or limit order. However, this tactic doesn’t always work. If there is a sudden large downward movement that pushes the market price below or above your desired price, your stop-on-quote order might not be filled.
  4. Consider Straddles.  A long straddle strategy involves buying a put and a call on the same security at the same strike price.  You would use a straddle if you believe that the price will make a big move after the earnings announcement, but you’re unsure if it will be up or down. You would lose money on the straddle if the price move wasn’t large enough to offset the cost of buying both options.

Next Step: Use our Market Calendar to research earnings reports. Log in, go to the Quotes & Research tab and choose Market Calendar from the left menu.

Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options booklet. You can also order a copy of the booklet by phone at 1-888-OPTIONS or obtain a copy at a Scottrade branch office.

Multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.

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