The Importance of Earnings Reports

When it comes to the realm of business and the stock market, we always hear of companies releasing their earnings report. These reports are released quarterly, and generally report the company's performance throughout that period of time. Investors use these reports to analyze the financial status of a corporation which in end helps them determine whether or not they desire to invest in that company. These reports are more geared towards those focused in fundamental analysis of stocks due to their reliance on performance ratios (Such as earnings per share.) Quarterly reports give insight on all three of the company's financial statements which include the balance sheet, the cash flow statement, and the income statement. Investors are generally geared at focusing on the sales, net income, and expenses that the company incurred for the quarter.

One important thing to note about the release of quarterly earnings reports, is that the share price of the company sees a rise in volume and volatility leading up to the reporting date. There is always speculation as to whether the company will outperform estimates or underperform these estimates. As options traders, we try to capitalize off of this rise in volatility. There are four earning seasons throughout the year, and these seasons allow a lot of trading opportunity as more focus is spent on the individual companies that are releasing their earnings.

It is important to add that a lot of people lose big/win big when they essentially bet on which direction the stock is going to move in. Just because a company potentially beats earnings estimates, there may still be a drop in the share price of the corporation. Vice versa, some companies release earnings that are underwhelming, but somehow the share price of the company sees a rise. This could be due to positive guidance (Guidance is a publicly traded corporation's official prediction of its own near-future profit or loss, stated as an amount of money per share) that the company releases during the earnings call (An earnings call is a teleconference, or webcast, in which a public company discusses the financial results of a reporting period.) It is recommended to play the next day reaction in share price so that your risk is decreased and the opportunity for reward is still available.


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