Earnings season is an important time for the market and an interesting time for options traders.
Earnings Season Trading Techniques
With the 2nd quarter earnings season fast approaching it calls to mind the importance of earnings and the season. This is the time when the companies whose stocks make up the stock market give us their report cards. We get to see how well they are doing and those results are what drive market trends. When businesses are making money and profits are rising the market is happy and stock prices move higher, when business aren’t making money or profits shrink the market is sad and stock prices move lower.
While longer term traders may choose to avoid trading during the season so as to not hold an option when a report is released shorter term traders can find many opportunities for trading. Depending on expectations and the reality of results stock prices are prone to make big moves on high volume in the days leading up to and the days following a big release. IQ Option’s Classic Option category includes 500 NYSE listed stocks with option expiry up to one month. The Classic Option is the longer-term option choice with expiry each Friday of the month.
Finding those opportunities is the trick. There are lots of ways to do it but I like to keep it simple, the more complicated a system the more that can go wrong with it. I use a top down approach with which I assess the general market expectation for the season, then look to the sectors with the best/worst outlook and dig deeper into those sectors looking for trading opportunities. There are several places on the Internet to find data on earnings including Factset and Bloomberg.
US Stocks Earnings Outlook And Opportunities
This time around the earnings outlook is good. US stocks earnings growth returned to the market 3 quarters ago and is expected to continue for at least the next 7 including the current. Growth has been expanding since the market exit an earnings recession and reached double digit proportion last quarter. Looking forward the current reporting season is expected to see growth for the S&P 500 as high as 10.5% with that expanding next quarter to over 12.5% and higher next year. This is what underpins the current bull market.
On a sector by sector basis 9 of the 11 S&P 500 sectors are expected to post earnings growth this quarter. The 2 expected to decline are Utilities and Telecom, the 2 with the highest expected growth rates are Energy and Materials and those are the two I will focus on for trading. The next step is to pick assets to trade and that is easy. Look to the earnings calendar and find out which days companies in each sector are reporting and use that information to choose which companies to trade. If one company reports this week and another reports next week the one reporting this week is the one you want to focus on.
Chevron is a solid choice in the energy sector. It is an integrated oil conglomerate benefiting from all levels of the oil market. The sector and stock have been in near term down trend due to falling oil prices but remain the sector with the strongest forward earnings outlook of all. This stock is bottoming on a long term support level ahead of earnings, earnings are scheduled for July 28th.
Freeport-McMoran is a great choice in the materials sector. The stock has been trying to move up off of a bottom over the past month and broke to a new high as I was writing this post. Earnings are scheduled for July 25th.
If a company has already reported it’s too late to trade that stock based on its earnings news but you can use that news to help with other opportunities. If one micro-chip company saw an unexpected rise in sales it is likely they all did, if the first company sees stock prices rise on the news it is likely the others will too. As the event approaches watch the charts for signals and entry points keeping a close eye on support and resistance targets.
Expiry can be approached in 3 ways:
- The first is to trade with the expectation of expiry before the company reports earnings. You might do this if you are trading one stock based on positive results from another company within the same sector.
- The second is to trade before the earnings release and hold the option until just after the release. You might do this if the stock provides an opportune entry point before the release and you expect the report to move the market.
- The third is to enter the trade after the release and ride the wave of momentum created by the news.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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