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How to Trade Options » STOCK OPTION TRADING » Earnings Report Definition

Earnings Report Definition

So what’s a good earnings report definition and why is it important for options traders? An earnings report is something that is required by corporations law and is the way that publicly listed companies report their earnings to shareholders.

These report typically include an income statement, a balance sheet and statement of cash flows for the quarter, as well as year to date. The notes to the report also include an analysis of company activities and financial condition, along with various risk disclosures and other matters which may affect shareholders’ interests.

Some countries such as the USA, require earnings reports on a quarterly basis, while others may only want it semi-annually. Either way, when an earnings report hits the news, it can often (but not always) trigger a dramatic reaction by the market to that company’s share price.

Most companies in the USA file their earnings reports in January, April, July and October.

When analysts look at earnings reports, they’re most interested in certain financial ratios such as “earnings per share” (EPS) and “price-earnings ratio” – and these help them decide whether to buy, hold or sell the shares in that company. Since analysts tend to work for large fund managers and brokerage firms, their combined decision making can often have an impact on the share price.

Using Earnings Reports for Options Trading

So how can our understanding of an earnings report definition help us to trade options more effectively? Well let’s think about it. We would most likely be interested in an option trading strategy that relies on large and sudden potential moves in the price action of a company stock. Since earnings reports can be the trigger for these, we simply apply the appropriate strategy as we see the report date pending.

One such strategy is called the Options Straddle. This strategy involves the simultaneous buying of the same number of both call and put option contracts, at the same strike price and with the same expiration date. The strategy relies on the underlying share price moving significantly before option expiration date – so much so, that the “winning” position will more than compensate for any loss on the “losing” position and realize an overall profit. I have personally taken straddle trades which have realized 100 percent profit and many, more than 50 percent.

You simply put on the straddle position about three weeks before the earnings report comes out and wait for the market reaction to it. You need to do it before the report, because options implied volatility tends to increase as the earnings date approaches. You can read more about it at our options straddle page.

Another strategy that works well with earnings reports is are Victory Spreads. These are explained in detail on one of the videos in the very popular Trading Pro System.

 

 

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DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.