Earnings Season Survival Guide

Buy, sell, hold?

The days of reckoning are upon us! So earnings season officially kicks off today with Alcoa’s AA report. CSX Corporation CSX and Novellus Systems NVLS are on today’s schedule as well. As I write this at 6:00 a.m. Monday morning, futures in the S&P, DJX and Nasdaq are lower after a week’s worth of gains.

I wanted to take a couple of quick minutes today to highlight some things to remember and consider during earnings season as you make your decisions to buy, sell or hold. These things are also important to remember if you plan on employing an options strategy. Some high-profile companies that are scheduled to report this week are:

INTC, YUM and FAST on Tuesday
MAR on Wednesday
AMD, JPM and GOOG on Thursday
BAC, GCI, C and GE on Friday

There are many others reporting; the above issues are simply some of the more heavily followed. If you are wondering when a company of interest reports earnings, check out the OptionsHouse Research tab to locate the next earnings date under the “Events Calendar.” If none is posted, go to the company’s website, as some corporations may announce changes close to its report date or wait to disclose their exact earnings date.

Now that you know the relevant earnings date for your stocks, here are some factors to examine when deciding how to proceed:

What are EPS expectations?

Take a look at not only the consensus estimates, but the range of EPS estimates and commentary offered by analysts.

What has the stock done in past earnings reports?

Does the stock tend to be volatile or more muted? What sort of moves does it typically make in the days before and days after a report?

How have peers and the sector performed in the last quarter?

If other stocks in the sector have already reported, what did they have to say about the climate of the last quarter? Of course some companies in a particular sector are stronger than others, but listening to a conference call or two may help you get an idea of what is going on in a particular space and help you make an educated decision moving forward. Also be sure to take into account any data that has been released in the past quarter, like retail and auto sales for those sorts of companies or even new home permits if you are invested in a new homebuilder.

Do you have a profit or a loss going into the report?

This can affect the action that you take ahead of an earnings report. For example, if you are in a very profitable situation and happy with your current return, you may either choose to exit the trade altogether or use an options strategy such as a collar to ensure that you protect any profits that you already have. If you are at break even or in a losing situation (and not feeling particularly strong), you may be more compelled to exit the trade altogether to reduce the risk of further loss.

Where is implied and historical volatility?

Take a look at the volatility charts (also available in all OptionsHouse accounts, including virtual trading accounts). First examine the observed/historical volatility of the stock and note its recent trend and what it has typically done in the past. Next, compare that actual volatility to the volatility in the options themselves (implied volatility, or IV). If the implied volatility seems relatively high, you may be more inclined to utilize an options strategy that is short vega (one that would benefit from a decline in volatility). If IV seems relatively low compared to historical and you think that the earnings reports may trigger volatility in the stock, then you may examine a strategy with a more positive vega bias. Implied volatility can also tell you what the options markets are expecting from the earnings move. You can use the probability calculator to figure that out fairly easily. *Remember that IV is just an expectation and past performance does NOT guarantee future results.

What are the charts telling you?

Moving averages, support and resistance levels, and other major technical indicators still do play a role in trying to determine the levels a stock may move to or stay within. Be sure if you are a technical analyst (and maybe even if you are not) to at least be aware of these levels as well as the 52-week high and low in your stock.

Don’t forget the Fundies!

The ability of a company to earn and grow its earnings is the basis for many investors’ outlook. Examine the trailing price-to-earnings (p/e) ratios as well as forward projections in addition to any other company-specific fundamental data such as debt, margins, etc. But most importantly, remember your thesis for taking a position in the stock. Does that opinion of the stock and its business still hold true, and do you feel it will hold in the future?

There are many other angles to take when trading a stock around its earnings report. I hope I was able to get your gears turning on a few things I like to consider before I make some of my investment decisions.

Photo Credit: volpelino

Share and Enjoy: