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How to Trade During Earnings Season

Plus500 | Thursday 15 April 2021

Earnings season is an unofficial timeframe that comes around as US companies release their quarterly earnings reports at the end of each fiscal quarter and lasts several weeks. 

Most publicly traded companies follow the standard calendar, with the ends of their financial quarters coming at the end of March, June, September, and December. Approximately one week to ten days later, the companies release a report that details the status of their revenue, expenses, profit, and financial outlook. 

earning season

What to Consider During Earnings Season

Earnings season has the potential to shift the trend of an entire sector, but sometimes it can have little effect on the company’s shares. For example, even if an entire sector dips during earnings season, that does not necessarily mean that the shares of a company you are following will dip.

What is the potential impact?

Before deciding to trade on a particular share, traders may review recent news surrounding the company. Was there a recent press release during the quarter? Were there any upticks in positive reporting? Did the company have any scandals that may affect its reputation?

 These can all give some ideas on what the upcoming report may say. 

Historical data

Looking at a share's price movements from the previous year, half, and quarter may give insight into how traders will react to whatever the upcoming earnings report says. If a year before, a company’s earnings report showed growth but the price dipped anyway, try to find the reasoning behind this. If their revenue decreased but share prices rose, find out why traders felt optimistic.

Past performance is not always indicative of future performance. Yet, it is still something to take into consideration.

Expect the unexpected

Sometimes, share prices rise and fall without a clear underlying reason. One example of this was Zoom (ZM) in Q3 of 2020. 

During this quarter, Zoom reported a revenue of $777.2 million, while only $693.4 million was expected. In addition, their earnings per share came in at $0.99 versus the predicted $0.75. 

Yet, despite these seemingly optimistic numbers, the share price dropped 22.5% from $486.90 the day of the announcement to $377.20 two weeks later on December 14th. 

While the exact reason for this is unclear, it may be that traders worried about Zoom hitting its peak with Coronavirus vaccines around the corner, and with more in-person interactions, there would potentially have been less demand for video conferencing.

Another example is that after years of publishing losses, Tesla (TSLA) reported its first profitable quarter at the end of 2019. In 2020, share prices rose 792.9% as they continued to be profitable. While this may seem obvious in hindsight, experienced traders were surprised that shares could rise so much with only a few profitable quarters.

While their annual profit of 721 million may be small compared to some other companies, traders pushed up share prices and raised the company valuation to about  $700 billion by January 9 2021. 

Trading During Earnings Season

Choosing companies

The first step to developing a strategy is narrowing down the number or range of potential companies to research. This search can begin by reviewing companies within a particular sector of interest, based on which companies have caught your attention while trading between Earnings Seasons.

Checking the news regularly before the beginning of earnings season will help traders keep up-to-date on global politics, acquisitions, and potential IPOs. If a trader begins reading headlines in January in preparation for April earnings, they will have better insight into various market factors that may potentially be difficult to digest with only a week to go before Earnings Season.

Research

Once you have chosen companies whose shares you wish to trade, focus on one at a time to dive deep into each business. Ask yourself, what are their key sources of revenue? Is their most popular revenue source also the most profitable? 

For example, Disney (DIS) is well known for their parks and theatrical releases, yet in 2020 it was Disney+, their online TV and movie streaming service, that surpassed expectations with 73 million paying subscribers. While people may not think of streaming when thinking of Disney, it has proven to be a vital revenue stream.

It is also important to review analyst expectations to predict the target price per share. Whether you agree or disagree with the forecast, it may impact the company positively if they exceed the expectations or negatively if they fall short, regardless of their actual earnings. 

A trader may speculate that a company’s revenue stream presents an opportunity for the share price to rise, so they may open a CFD ‘Buy’ position, to benefit from a potential uptrend. On the other hand, they may speculate that this revenue stream is not sufficient and the buzz around the shares will soon fade. This may lead them to open a CFD ‘Sell’ position which will allow them to potentially benefit from a falling share price. Both of these positions have inherent risk, should a position move in a direction that is not favourable to the trader. 

Stick to your strategy

Once you have done your research, pick a strategy and stick to it.

When entering a trade that clearly moves in your direction, it is easy to ride it until you see a clear indicator to sell, but this rarely happens. Following earnings releases, share prices have the potential to move higher and lower throughout the day. During these volatile periods, it may be difficult to take a step back and see the big picture.

Consider when you want to enter and when you want to exit. Which numbers are you looking for and what is your ceiling? Consider how much risk you are willing to take on and what the full strategy will be, all before entering a trade.

Regardless of how or what you trade, Earnings Season holds the potential for market volatility.  Trading CFDs with Plus500 allows you to trade on various scenarios by going long if you feel the price will rise or going short if you believe the price will fall. Our tools, such as News & Market Insights, indicators, and risk management features can help you make clearer choices both before opening trades and while they are active.


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This information is written by Plus500 Ltd. The information is provided for general purposes only, and does not take into account any personal circumstances or objectives. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. No representation or warranty is given as to the accuracy or completeness of this information. It does not constitute financial, investment or other advice on which you can rely. Any references to past performance, historical returns, future projections, and statistical forecasts are no guarantee of future returns or future performance. Plus500 will not be held responsible for any use that may be made of this information and for any consequences that may result from such use. Hence, any person acting based on this information does so at their own discretion. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research.

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